Search
0203 327 0567

The charges associated with invoice finance

Invoice finance is an incredibly valuable financial tool for your business. The issue of late payment is significant, with a reported 440,000 SMEs in the UK impacted. Invoice finance is a crucial tool in alleviating the pressure and helping companies overcome cash flow shortcomings.

Lots of companies already use invoice finance to manage their cash flow. If you’re considering it, it’s crucial to know precisely how it works and the implications for your business.

Invoice on a laptop with paid stamp

Part of this means understanding the charges associated with invoice finance. As with most forms of funding, you will have to cover fees when seeking support, which may factor into your affordability. We’ve listed the main charges associated.

Discount charges

Discount charges rate of interest over the bank’s base rate to determine the borrowing rate applied to your facility. It will usually vary between 2 and 5% over the base rate depending on your credit rating, historical performance, and the level of service that the lender provides.

It is calculated daily based on the total invoices that are being discounted and charged monthly. The precise amount will vary between lenders, so it’s worth checking the market before committing to any facility.

Check on any minimum base rate clauses that may apply to your facility. 

Service fees

As with any funding solutions, there are fees associated with the administration and maintenance required under any invoice facility.

These fees will vary between lenders with some charging fixed fees and other charging a percentage of the invoices that are being discounted or factored. The following may also will affect the amount of such charges:

For invoice factoring, you will typically expect these fees to fall between 0.75% to 2.5% of annual turnover.

Invoice discounting tends to have fewer service fees associated as you continue to collect the debt yourself, so the lender has less to do. Generally, the service fee will be in the range of 0.2% to over 1% based on your annual turnover.

Something else to bear in mind is that invoice finance facilities will be set up with a borrowing period for each invoice. It is typically either 90 or 120 days from either end of month or the date of the invoice and is agreed in advance.

At the end of that period, if the invoice remains outstanding, the cash advance is repaid and funds available to drawdown are reduced accordingly.

Trust, chaps and Bacs fees

It is a requirement of using an invoice finance facility that the lender will set up a separate trust account into which all invoices will be paid. This is separate to your own bank accounts.

All receipts from customers will now be paid into this account as this is the account from which your drawdown of funds will occur.

Every lender’s fees for this are different, with some being free. Make sure you understand costs associated with trust accounts.

Additionally, there may be fees associated with chaps and Bacs payments from the trust account, as well as termination costs, audit fees, and arrangement fees.

It is important to understand all of the costs associated with your facility as the costs can vary dramatically between funder.

Credit protection charges

An invoice finance facility will fall into one of two categories:

  1. A recourse arrangement, where you are responsible for any debt that isn’t recouped from customers (usually associated with invoice factoring)
  2. A non-recourse agreement, where the provider absorbs any outstanding debt from your invoices (associated with invoice discounting)

If you have a non-recourse arrangement, the lender may charge credit protection to cover their liability for any unresolved debt.

These fees tend to be small (around 0.5% to 2% of turnover) and calculated on the risk presented by your company. However, they are often referred to as ‘hidden fees’, so it’s worth checking if your provider charges them.

What should I do about these costs?

Although charges apply to invoice finance, they shouldn’t be a deterrent. Most lenders (invoice finance-based or otherwise) will charge additional fees for their services, so you can expect them from any funding avenue.

It is worth mentioning that invoice finance is one of the cheapest forms of funding solutions on the market, with the fees likely to be far less than a typical commercial loan. It’s also 17% cheaper than an overdraft on average.

The charges associated with invoice finance should act as a point of comparison. Knowing them will enable you to find the best invoice finance provider for your needs, offering competitive fees and cost-effective support.

Conclusion

A reported 27% of businesses have an invoice finance facility set up. With late payments plaguing SMEs, more companies will likely be considering support to ease cash-flow burdens.

If you are considering accessing invoice finance for your company, it’s vital to be aware of the associated fees, so you’re fully informed before committing. It will also allow you to compare lenders to find the perfect fit for your needs.

Pegasus Funding helps secure the best invoice finance solution for your business. We have access to over 60 invoice finance lenders and are able to connect you with the right match for your requirements.

Get in touch today to find out more.

Filed under: add_action ( 'om_the_article_category' );
|