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It is wrong to automatically assume that invoice finance is expensive or alternatively believe that it is a cheaper option than say overdraft finance. Charges are bespoke to your specific business. Therefore the
percentage administration charge (see below) applied to one business will differ to that of another. Also you will need to consider the benefits of this method of finance against the costs and alternatives.
The alternative of course may include not growing your sales as you had hoped because an overdraft facility would not support it and consider the lost income and profit as a result. A benefit of using invoice
finance may be to pay your suppliers earlier for a settlement discount and offset the charges or make savings as a result etc etc. Circumstances differ and only you as a business manger can answer the cost/benefit question.
For an indication of the approximate cost of invoice finance use our Quick Quote or for a more accurate cost particular to your company use our Invoice Finance Search.
Charges can vary considerably between different factors and again it is wise not to restrict your dialogue to one provider when considering invoice finance. Instant quote will give a very general idea of cost, although
we strongly recommend that you use our Invoice Finance search to obtain quotes directly from the factors.
There are two principal charges for an invoice finance facility:
1. Administration charge.
A percentage charge is applied by the factor to your gross (i.e. including VAT) factored / discounted turnover. (In most cases this is your annual turnover less any non factored debts as agreed with the factor. Selective
turnover agreements can occasionally be provided by specialist providers).
This charge is usually applied to your invoice finance account each time you notify to the factor new sales. Therefore then this is not a one off or up front payment, but is debited to your account every day, week,
period - however often you update the factor with new sales.
This charge will be made by the factor in the case of factoring to provide you with the facility and a credit management service. In the case of invoice discounting this will provide the finance facility and the cost of
the factor's monitoring / auditing.
It is likely that it is this charge that you will view as the additional cost to your business in using invoice finance. This though must be balanced against the savings that can be gained through the facility, which may include:
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· supplier discounts available as a result of your improved cash position.
· no longer providing customers with early settlement discounts.
· profit on increased sales resulting from the flexibility given by invoice finance.
· replacement of fees associated to an overdraft facility. Establishment fees, review fees, account activity charges etc.
· replacement of credit controllers in your business (factoring)
· time savings for the partners/managers of your business in no longer having to complete the credit control personally and allowing you to concentrate on what your business really does.
· any possible improvement in the debt turn of your business (factoring)
The cost of not using invoice finance can include:
· lost opportunities given your banks inflexibility or speed of response.
· losses arising through bad debts (non recourse).
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2. Interest Charge (referred to as discount charge)
Interest charges are applied to the funds that you choose to use from the availability of finance generated, in the same way you would pay interest on an overdraft facility. The application of these charges can vary though
between factors from daily to monthly, based on an average monthly utilisation or against the daily fluctuating balance.
This charge is calculated at an agreed margin over bank base rate (LIBOR linked facilities are available on request). Typically this margin is lower than that applied by banks to overdraft facilities.
Other possible charges.
Care should be taken in choosing the right factor in relation to other charges. Blue Asset Finance can guide you through and help you avoid other charges with our free advice service. Other charges may include:
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· A re-factoring charge (an additional charge on debts reaching a certain age).
· Transfer charges when requesting the transfer of money to your current account.
· 'Trust account' charges applied to the transactional activity of your invoice finance account.
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