Invoice Finance
Invoice finance is a great way to inject capital to your business by releasing the funds that are currently tied up in your debtor book. If you’re waiting an extended period of time to collect what you are owed by customers, invoice finance allows you to get the cash promptly without the need to wait. Typically, a business will receive around 80% of the value of their outstanding invoices, however this can be as high as 95%, with some lenders lending 100% of the invoice value.
Cost of using Invoice Finance
More and more businesses are choosing to utilise invoice finance to fund the growth and cash flow of their business. Costs of invoice finance facilities can vary depending on the sector served and the level of risk perceived by the lender. When it comes to pricing an invoice finance facility, the lender will look through the financials of both the borrowing business and their clients to assess the risk and likelihood of being repaid.
The fee that you will pay depends on some variables such as how well your business is doing or invoice volume. In most cases, the most common invoice financing fees will be: discount charge and service charge.
Service Charge
The service charge is fee that’s typically charged monthly by the lender. The service charge can range from 0.1% – 3%, and is calculated based on the usage of the facility. If the business draws down £100,000 of invoices in a month and the service fee being charged is 1%, then the business would pay a service fee of £1,000. This is typically deducted at the point of drawdown, but can vary from lender to lender.
An important point to be aware of is typically the service fee will be subject to a minimum fee. If the business in the example above didn’t drawdown any funds from the facility, the lender will most likely charge what’s know as the “minimum” fee. This will be a fixed fee, which is usually based on the size of the credit facility. The business either pays the minimum fee, or the service fee, which ever is higher.
Discount Charge
The discount charge is the charge based on the number of days the invoice is outstanding for. The fee is an annual figure, which is calculated based on the number of days the invoice is outstanding and is charged on a monthly basis. The quoted figure is usually above the base rate (more on this below in the hidden costs section).
If the business above has a discount fee of 3% (we’ll leave out the base rate for simplicity) and borrows £100,000 against their facility for 30 days, the discount fee for that month would be £247. This can be calculated by taking the amount being borrowed, multiplied by the discount rate, dividing by 365 and then multiplying that number by 30 (or the number of days outstanding). The cost of invoice financing is often miscalculated, typically a business that receives a 1% service fee and a 3% discount fee assumes they will pay 4% a month, when in reality the figure is typically much lower.
Hidden Costs
There can be some “hidden” costs in an invoice finance facility. These are usually displayed in the contract, but they can be hard to understand.
Here are a list of possible hidden fees:
Overdue Fee- a lender may charge you a premium if an invoice is overdue.
Termination Fee- your invoice financing provider may charge you an early termination fee if you choose to end your contract early or without noticing the provider by giving an early notice.
Base Rate- some lenders will use their own internal base rate rather than the bank of England base rate, it’s important to pay attention to the base rate being used as it could drastically change the costings of an invoice finance facility. This isn’t meant to be intentionally misleading and is usually based on the lenders own cost of borrowing.
Transfer fees- some lenders will charge a fee to transfer the funds to your account
Trust account fee- some lenders will charge a fee for the trust account being used
Invoice Finance Pros
- One of the biggest advantages of using invoice finance is improved your cash flow. Advancing funds tied up invoices can streamline cash flow and provide cash that can be used for operational costs or to accelerate expansion.
- You will receive the funds very quickly. Setting up with a provider can usually take a week or two but once the arrangements are done then you can get the funds within 24 hours. This will help pay any remaining business expenses and ease your cash flow.
- Typically businesses will have a good chance of being accepted for invoice discounting facilities compared to other financing options such as unsecured loans. If the business trades with other businesses and their clients and creditworthy, typically an invoice finance facility can be issued. This makes it a great option for both growing and more distressed businesses.
- A business will typically be able to raise more from invoice finance than other funding sources as a result of their customers creditworthiness being taken into account.
- Invoice finance facilities can be very flexible, with many lenders proactively increasing credit limits for growing businesses.
- Typically invoice finance facilities won’t require additional security. Most lenders will ask that at least one director is a homeowner and will typically ask for a personal guarantee, however in most costs they won’t ask for additional security such as property or plant and machinery.
- Invoice finance can be very cost effective compared to other facilities such as unsecured loans.
Invoice Finance Cons
- Invoice finance isn’t a good option for businesses whose clients are typically late or delinquent with payments as it could lead to increased costs with facility usage.
- Invoice finance usually isn’t appropriate for long term borrowing needs.
- For businesses with short payment terms, invoice finance facilities may not be that useful.
Is invoice financing the right option for your business?
Invoice financing is a fantastic option for businesses that trade with other businesses and are looking to improve their cash flow. When considering additional funding for your business, it’s important to review a range of different options and work with a specialist who can help explain the different costs and terms.
Peak Business Finance specialise in matching businesses with suitable funding facilities.
Our range of financial products include business loans, invoice finance, revenue based finance and much more.
Fill out our application form or leave your details and one of our experienced team will be in touch to discuss your funding needs.