The costs of invoice discounting can change depending on the a number of factors by way of the company offering the service. These are often negotiable, is its a good idea to consider several suppliers
This type of business finance provides you with instant access to cash tied up in your outstanding invoices.
An invoice discounting facility makes business much more flexible than an overdraft or business loan.
In this article, we’re going to take a quick look at what is invoice discounting and the costs that are associated with it, we will weigh them up against the benefits.
How much does invoice discounting cost? well if you’re one of the 60% of British businesses that struggle with cash flow problems, the prospect of invoice discounting is probably a very attractive one.
Rather than having to wait for 30-days, 90-days or perhaps even longer for clients and customers to pay their invoices, you can get the money straight away, which means you’ve got the funding to use as you please.
What are the Costs of Invoice Discounting?
It’s firstly important to note that not all invoice discounting providers are the same, and not all products and agreements are the same either. That means that this article won’t be able to tell you exactly how much or what are the fees and costs of invoice discounting for your business and situation, but we can give a good idea.
For many businesses and industries that are struggling with cash flow, the prospect of invoice discounting is a very attractive one. Rather than having to wait for 30-90-days or perhaps even 120 days for clients and customers to pay their invoices, you can get the money straight away, which means you’ve got the funding to use as you please.
Whether you’re having difficulties making ends meet or you want the freedom to expand quickly, invoice discounting can be very effective. Of course, as with all forms of lending and other financial products, there is a cost associated with the service, which may mean that some companies are put off setting up an invoice finance account with a lender.
The fees your are likely to pay for an invoice discounting arrangement tend to change from one lender to the next and are often negotiable. As fees can differ quite significantly, with specialists in a particular industry often the most competitive, it’s essential you contact several providers for a quote.
The follow terms are likely to see included in the quote are:
- Discount charge
- Credit management (service) fee
- Additional costs for services such as credit protection
- Notice period to end the service – some providers have notice periods of up to a year which could be costly for your business
Discount charges
Discount charges work in exactly the same way as bank interest.
Typical charges range from 1.5 per cent over base rate to 3 per cent over base rate. The discount charge is calculated on a daily basis and usually applied monthly.
Credit management fees
There will be a fee for credit management and administration. The amount will depend on your turnover, the volume of your invoices and the number of customers you have.
Typical fees range from 0.75 per cent of turnover to 2.5 per cent of turnover.
For invoice discounting, fees are typically lower than for factoring because you will still collect and manage debts yourself. They generally range from 0.2 per cent to 0.5 per cent of turnover. These fees are less because the level of service provided is significantly lower than with factoring.
Credit protection charges
These will be levied in non-recourse factoring arrangements, where the factor is liable for any bad debts. The amount will largely depend on the factor’s assessment of the level of risk.
Typical charges range from 0.5 per cent of turnover to 2 per cent of turnover.
Discounting costs: How much am I likely to pay?
Generally speaking, there are two main costs associated with invoice discounting, and they’re fairly straightforward. The first cost that you’re likely to come across is the service fee, which is the cost of having the facility in the first place. Usually, it’s calculated as a percentage of your turnover, and the percentage is likely to change depending on the turnover too, so there can be fairly significant differences in costs here.
This is the fee that’s most likely to vary between providers. It’s also often the case that fees for discounting will be lower than factoring, as there are fewer services being provided by the credit company. In most cases this fee is payable monthly and is agreed either in monthly periods or on a rolling agreement.
The other cost is the actual discount fee, which is the cost of the borrowing itself. For each invoice that you receive an advance for, you’ll be charged a small finance fee (similar to the interest on a loan) which is usually a few percent. This is quite simply to cover the time between you receiving the funds, and the finance provider receiving the funds from the cleared invoice.
Aside from these two main costs, there can also be additional ones that will vary from lender to lender. For instance, in some cases there might be charges to end the agreement early, because some are agreed over fixed terms. There might also be additional services added on to the package that have other costs associated with them too, and in some cases there might even be an arrangement fee. Always make sure you know exactly what you’re looking at when making comparisons, because hidden costs can quickly add up. Try to use some example finances to see how much respective companies would cost.
Example of Costs and Fees:
£1,000,000 Sales Turnover Per Annum – Confidential Invoice Discounting
- Administration Charge – 0.6% of turnover = £6,000 plus VAT per annum
- Discount Charge – 2.5% over bank base rate – £4,604 plus VAT per annum
- Equivalent to £6.24 plus VAT per month, per £1,000 borrowed
Invoice discounting rates: Are they right for my business?
Deciding whether rates are right for you will mean making a business case for the invoice discounting facility. Find out how much benefit your business will receive by having invoices paid instantly, and then balance this up against the costs that you’ve been given when comparing and getting quotes from providers.
- Flexibility – your funding line increases at the same rate as your turnover meaning that you don’t need to renegotiate terms
- Confidentiality – with this facility, we keep our involvement confidential from your customers
- Bargaining Power – invoice factoring can help you to negotiate better terms with your suppliers
- Faster Growth – grow your business at a much faster rate due to the flexible funding line
Weighing Up the Costs of Invoice Discounting
When it comes to deciding if the costs are worth it in the first place, businesses will need to get a rough idea of how much the financing of each invoice is going to be worth to them. In a great many cases, the cost of the facility is negligible compared to the potential costs of having poor cash flow, which is why invoice discounting is now used by thousands of UK businesses.
Good cash flow can increase profits, and prevent the use of more expensive types of credit. It’s essential however to sit down and understand exactly how much the costs will be and whether they’re right for your business. This may mean that it’s worth consulting outside advisers.
Read more: Invoice Discounting for small businesses
F.A.Q’s
What is the cost of an Invoice Discounting facility?
It is the fee the invoice discounting company charge you, usually on a monthly basis, for releasing the cash to you. These discounting charges are worked out on a percentage basis of the invoice value, typically ranging between 0.5 – 5%.
Invoice Discounting Facility Cost Example
Small Business - £250,000 Sales Turnover Per Annum. Invoice Discounting (finance released £35,417) Administration Charge - 1.7% of turnover = £4,250 + VAT per annum Discount Charge - 2.5% over bank base rate - £1,151 + VAT per annum Equivalent to £12.71 + VAT per month, per £1,000 borrowed
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.