Confused about all the different invoice finance pricing models out there? You’re not alone. In this blog post, we’ll explain the most common charges associated with invoice finance, so you can make an informed decision about which provider is right for your business.
What is invoice finance?
Invoice finance is a type of funding that allows businesses to free up cash tied up in unpaid invoices. It’s typically used by businesses that have a large number of invoices to pay, or who have clients that take a long time to pay.
There are two main types of invoice finance: factoring and discounting. With factoring, the business sells its invoices to the lender at a discount. With discounting, the business takes out a loan against the value of its invoices. Charges for invoice finance can vary depending on the provider but usually include a service fee, interest charges, and sometimes additional fees for things like bad debt protection. If you’re considering invoice finance for your business, it’s important to compare pricing and charges from different providers to make sure you’re getting the best deal.
How does invoice finance work?
Invoice finance is a type of short-term business funding that enables you to release cash from your outstanding invoices. It’s typically used by businesses with strong sales but who are waiting for payment from their customers.
The way it works is simple: the lender provides you with an advance on your invoices, which you can then use to cover the costs of running your business. When your customer eventually pays the invoice, you repay the loan plus any fees and interest due.
There are two main categories of invoice finance: factoring and discounting. With factoring, you sell your invoices to the lender at a discount and they chase payment on your behalf. With discounting, you continue to chase payment yourself but pay a fee for the privilege of being able to access funding against your invoices.
Factoring is often seen as the more expensive option, as you’re effectively paying for someone else to do your credit control. However, it can be a good option if you don’t have the time or resources to chase payments yourself. Discounting can be a more cost-effective option if you’re comfortable chasing payments yourself but need some help with cash flow in the meantime.
Whichever option you choose, it’s important to shop around and compare pricing before committing to any one lender. Invoice finance rates can vary widely so it’s worth doing some research to find the best deal for your business.
Invoice Factoring Fees Explained
When it comes to the fees for factoring services, businesses should be aware that there is usually a small percentage charged on the total amount of each invoiced financed. This fee could vary depending on various factors such as the type of industry your business belongs to and what country you are based in.
In most cases, businesses can expect to pay between 0.3% and 5% of their invoiced value as a factor fee. For example, if the outstanding balance of your invoice is valued at €10,000 then you might have to pay 3% in factor fees; meaning that you will net €9,700 in this scenario.
Additional costs may also apply but these are typically included within other service charges or might be considered apart from the factor fee itself. Some invoice factoring fees are:
1. Application Fees:
When businesses are first starting out with the process of invoice factoring, they may have to pay an application fee in order to cover the cost of setting up the service within their business. This fee can be a chargeable amount or might be taken directly from your account through a direct debit when you first start using the service.
2. Initial Setup Fees:
After your initial application fee has been accepted, you may also need to pay a setup or sign-up fee that will go towards the costs of opening and setting up your account within the finance company’s software system and getting everything ready for use. This fee could vary depending on how much work is needed in order to set things up but some companies don’t charge this at all so it’s always worth checking before committing yourself.
3. Maintenance Fees:
Another type of invoice factoring fees that could be applied is a maintenance or management fee; which is charged every month for using the service and helps cover any additional costs such as customer queries and administration associated with running your account. This type of monthly fee is quite standard so it shouldn’t come as too much of a surprise when you see it on your statement.
4. Termination Fee:
If you decide to cancel your invoice factoring service, or if the finance company decides to cancel the service due to missed payments, then a termination fee could be applied in order to cover the costs of closing down your account and any outstanding balances that are owed. This type of fee can vary depending on the company but is usually a set amount that is taken from your account upon cancellation.
5. Early repayment fees:
Some lenders may charge an early repayment fee if you repay your loan early (before the agreed term). This is typically around 1-2% of the outstanding balance, so it’s something to bear in mind if you think you may be able to repay your loan.
6. Late Payment Fees:
If you are late in making a payment to your factor then a late payment fee could be applied in order to cover the costs of chasing up the payment and any additional administration associated with this. This type of fee is typically charged as a percentage of the total invoice value that is outstanding and can vary depending on the company, so it’s always worth checking before agreeing to use their service.
7. Upfront fees:
These are typically charged by the lender when you first take out the loan. They can vary depending on the lender and the amount you’re borrowing, but they’re usually around 1-2% of the total loan amount.
8. Annual fees:
Again, these can vary depending on the lender and the amount you’re borrowing, but they’re typically around 0.5-1% of the total loan amount.
9. Interest charges:
This is how much interest you’ll be charged on the money you’ve borrowed. The rate will depend on a number of factors, including the lender, the amount you’re borrowing, and the length of time you need to repay the loan.
The fees listed above are just some of the more common ones that businesses should be aware of when using an invoice factoring service. It’s always worth reading through the terms and conditions before agreeing to use a factor so that you know exactly what fees will be applied and when.
Invoice finance can be an extremely helpful tool for businesses, but it’s important to understand the pricing and charges involved before you sign up for a service. We hope this article has provided you with a clear overview of the most common invoice finance charges so that you can make an informed decision about whether or not this type of financing is right for your business.
Get in touch with us at Funding Bay for your invoice financing needs.
Check out our invoice finance calculator here.
