Invoice Discounting and Factoring Fees: What You Can Expect

If you have been having problems managing your cashflow for some time and have decided to opt for a financing service such as invoice discounting or factoring, this may be one of the best decisions you could ever make for your business. With these types of services, you have the benefit of having cash on-hand whenever you need it without worrying if you will be able to pay your bills or your employees’ salaries on time. Factoring or invoice discounting allows you to draw on your invoices and receive a cash advance based on your sales ledger, and is way better than getting a bank loan simply because you are ‘using’ the cash you are expecting to receive anyway.

However, it is a decision that is not to be taken lightly. You need to know all you can about these services just so you can choose the right financing provider and maximise the service as much as you can. And just like any other financing service, invoice discounting and factoring come with fees as well.

Invoice Discounting and Factoring Fees: What You Can Expect

Here’s what you should know regarding the fees for invoice discounting or factoring:

The Fees for Invoice Discounting or Factoring

Keep in mind that the overall fees and cost for each type of service basically depends on the company providing you with the service. What you can do is make a comparison between different providers and consider each one’s discount charge or interest, their management and service fees, any fees for extra services such as credit protection, and their expected notice period if you would like to terminate the service. Some financing providers have a notice period of three months, whilst there are others who can extend their notice periods for one year.

The Interest or Discount Charge

The discount charge of financing providers work on the same principle as interest from a bank. A usual discount charge ranges from around 1.5% to up to 3% over the base rate. The interest or discount charge is also computed daily and is generally applied every month.

The Fees for Administration and Credit Management

You can also expect a fee with regards to administration and credit management, and this will also vary according to the provider. But the overall fee is also affected by your business’ turnover, the volume and amount of your business’ invoices, and how many clients or customers you may have. The usual fee for this ranges from between .75% to 2.5% of your turnover.

The Fee Difference Between Factoring and Invoice Discounting

Whilst most of the fees that apply to factoring are the same as those of invoice discounting, the fees you can expect for invoice discounting are generally less than those of factoring since you will be the one collecting and managing your clients’ debts and not the financing provider. For invoice discounting, the credit management fee can be between .2% to .5% of your turnover.

Fees for Credit Protection

A fee for credit protection is charged for a non-recourse factoring service, since this is where the financing provider is responsible for settling any bad debt. But the total fee for this will also depend on the financing provider’s assessment with regards to the risk level. The usual fee for credit protection is between .5 to 2% of your turnover.

Cashflow specialists like know full well the importance of choosing the right partner for financing. It is important that you work well with your financing provider so you can both strive for the same goals and arrive at the same results – that of allowing your business to grow through better cashflow.

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