How much does invoice factoring cost?

There’s a simple answer to this question: there’s no standard cost for invoice factoring.

The fee you pay will always depend on how well your business is performing, and the reliability of your clients.

In most cases (some providers offer a flat fee structure), the total cost of factoring will be primarily based on two things – the discount/factor rate and the length of factoring period.

A factoring company’s discount or factor rate generally varies between 1.5% and 5%. Broadly speaking, the higher the value of invoices you ‘hand over’, the lower your discount rate will be.

The factoring period on the other hand will depend on how long you give your clients to pay, and whether they actually pay during that time frame. Obviously, if the invoice factoring company has to wait 40 days for payment instead of 30 days, then that’s going to cost you more.

There are also other charges that might apply – such as service fees and collection fees – that may also increase the overall cost.

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Discount Rate – Factor Rate

The discount rate is often also called the factor rate. This is much like the concept of borrowing from a bank that you are likely familiar with. It is the fee the factoring company charge you, usually on a weekly or monthly basis, for releasing the cash to you.

Discount or factor rates are worked out as a percentage of the invoice value, typically ranging between 1.5 – 5%. Generally speaking, the more you ‘hand over’ in terms of value (quantity and size of invoices), the lower the factor rate will be. You get better returns on your factoring fees if you factor higher value invoices.

• Low-end factor rate – 1.5%
• High-end factor rate – 5%

(This is an annual rate and usually above the Bank of England base rate or LIBOR)

Length of factoring period

In a nutshell, the length of the factoring period is the amount of time it takes your customer to pay their invoice. Factoring fees reflect risk and patience for the factoring company.

As the discount rates are paid as percentages, usually weekly or monthly, the longer the time your customer takes to pay, the higher the factoring charges. Therefore, if your invoices have a 30 day payment period you will pay considerably less than if they have a 90 day payment period.

Invoice factoring cost example

Let’s consider a £20,000 invoice which is due for payment in 30 days. As a small business, you need some urgent cash to be able to buy the resources you need to take on a new client. So you turn to invoice factoring.

The lender has a service fee of 1% and a discount rate of 3%. Their terms state that you will get 80% of the invoice cost immediately (usually within a day or two), and full payment on the invoice when your client pays.

This means that you will immediately receive £16,000.

The service fee will be charged on the gross value of the invoice, so 1% of £20,000 is £200.

The discount rate is an annual fee. So, assuming your client pays on 30 days, we need to calculate 3% ÷ 365 (days in the year) = 0.008% (daily interest rate).

0.008% x 30 days (time taken for you client to pay) = 0.24%.

The discount fee is only charged on the funds advanced (the 80% in this example). So, £16,000 x 0.24% = £38.40.

Therefore, the total cost for factoring your £20k invoice over 30 days is £238.40.

What can affect the cost of factoring?

A factoring company will have their set parameters of how they usually work out a factoring rate. This will look at two key factors: the risk, and the volume of invoices.

Generally speaking, the lower the risk and the greater the volume, the lower the factoring charges. Conversely, the higher the risk, and the lower the volume, the higher the invoice factoring costs.

Understanding this in more detail requires an understanding of exactly what an invoice factoring company will be looking for to calculate factoring fees. The invoice factoring company is going to assess your risk and volume using certain criteria.

Invoice factors will consider:

• How much you will be factoring: The greater the volume, the lower the rates. This is probably the biggest determiner of your invoice factoring rates.
• The size of each invoice: No matter what the size of an invoice, the legwork for collection is exactly the same. Therefore it pays to have fewer larger invoices rather than lots of smaller ones. The invoice factoring company may seek to pass the costs of collection onto you, so consider which invoices you factor wisely.
• Your business niche and industry:The invoice factoring company will assess your business niche and the track record of your industry when determining your invoice factoring rates. Certain industries, such as recruitment, tend to be considered low risk as payment is normally simple and straightforward. On the other hand, the building trade can find themselves facing higher rates as they are deemed higher risk.
• The reliability of your clients:Reliable clients, who have a track record of paying on time, make for lower invoice factoring fees than those with a poor credit history. This does not always directly affect fees, but you may need to be more aware of overdue fees, or that the invoice factoring company may not accept invoices from certain clients at all.
• Your business reliability, longevity and turnover:Many factoring companies in the UK will want you to have been trading for at least a year. This can pose a problem for some start-ups. They may also expect you to have a minimum turnover, perhaps in the region of £25,000. In the UK, some invoice factoring companies want you to be a limited company. Being able to prove reliability will help you negotiate lower rates.

Invoice factoring costs vs benefits

Invoice factoring, and its value to your business, must be considered in the context of invoice factoring costs. Ultimately, you will not receive as much money on an invoice using factoring as you would on one where a customer pays you directly. However, the benefits of invoice factoring often outweigh the costs.

By using invoice factoring, you are able to raise cash and improve your cash flow, which can prove extremely beneficial for many small businesses that struggle to manage finances effectively. This might mean being able to grow, take on a new opportunity, or undertake essential repairs in order to keep business operations running smoothly. Without this ready supply of cash your business may struggle due to lack of cash flow.

There are also unseen cost benefits of invoice factoring. Invoice administration takes time and resources, which many small businesses and startups simply do not have. Handing over the administration of invoices to the factoring company can save a small business time by freeing up labour for more valuable pursuits such as new attaining business deals.

Cash flow consistently presents itself as a problem for startups and small businesses. These companies may turn to alternative forms of finance, such as bank loans, but these do not offer the same flexibility as invoice factoring. Furthermore, you may well find that invoice factoring brings you more in terms of cash, at a lower rate, compared to a bank loan.

Overall, well managed invoice factoring can provide businesses with a flexible, cost-effective, solution that will not only improve cash flow but also free up valuable time that can be used to progress businesses to new heights.

Other factoring charges

Beyond the basic factoring costs, you also need to be aware of some other potential factoring fees.

It is important that you are aware of any hidden costs so that you can get a true idea of invoice factoring rates. There are multiple different factoring charges that you need to understand and look out for. Knowing the potential for these factoring fees to be charged means you’ll understand to ask about them upfront.

Some other factoring fees to consider are:

• Origination fees
• Incremental fees
• Service fees
• Collection fees
• Overdue fees
• Unused line fees
• Renewal fees
• ACH transaction fees
• Wire fees
• Credit check fees
• Termination fees

Origination fee

Origination fees, otherwise known as draw fees, are flat rates that are assigned per invoice. Generally, factor companies will advance you 80% of the invoice but if you are charged a 1% origination fee then your advance is really just 79%.

Incremental fee

Some invoice factoring companies work on a flat-fee basis, rather than on a percentage discount rate. This can have it’s attraction, particularly if you are unsure of customer payment reliability. However, you might find that you are charged an incremental fee as the unpaid invoice ages. Incremental fees are calculated on a percentage rate on top of of the flat factor rate, and can therefore cost you more the longer a customer takes to pay. The percentage for incremental fees is usually a maximum of 1%, but it is still worth doing your sums.

Service fee

The service fee is the fee charged for delivering the facility, management and admin costs related to the clients account. This is the main admin fee for processing the invoice.

Collection fees

One of the benefits of invoice factoring for a small business is that you are handing over the administrative tasks of tracking, chasing, and collecting invoices. Occasionally, an invoice factoring company may try to charge you for the administration costs associated with collecting unpaid invoices.

Overdue fees

Similar to the above, a factoring company needs to mitigate the risk they face should your customers not pay their invoices on time. As a result, some factoring companies may charge you a flat fee for invoices that are past due. You should check the conditions of what happens should an invoice go overdue.

Unused line fees

When you first negotiate with a factoring company you will address the estimated amount you seek to factor per month. Some factoring companies have a minimum amount. If you do not use the full amount estimated then you may be subject to a penalty in the form of an unused line fee. These will be calculated as a percentage of the amount ‘short’ you are in terms of using their service. These rates are usually low, at around 0.15%, but they do form part of the overall factoring charges to consider.

Renewal fees

Similar to origination fees, you may find that some factoring companies charge you an annual cost for renewing your account. These are applicable 12 months after you first start the relationship and are either a flat rate, or a percentage of the size of your factoring facility. In the UK there are plenty of companies who do not charge this fee.

ACH transaction fee

When payment on an invoice is advanced to you there may be a flat rate transaction fee for sending these monies on to you. This charge is usually minimal, usually under £25, but do be aware it exists.

Wire fees

You may choose to receive your money in a different way from ACH (the preferred method). If so, your factoring company will likely be charged by their bank for doing this. This cost will probably be passed on to you in terms of a flat rate, usually anything up to £40.

Credit check fees

There are two types of credit checks the invoice factoring company may need to make – credit checks on you, and credit checks on your customers who have outstanding invoices. These credit checks will incur fees that the invoice factoring company may choose to pass on to you.

Termination fee

Some invoice factoring companies will require you to sign a contract for a guaranteed length of time. If you terminate the contract before the end date you may be charged a termination fee – usually a percentage of the size of your factoring facility.

Invoice factoring costs: Compare prices and quotes

To summarise, here is a list of the main contributing elements to invoice factoring costs:

• The discount rate / factor rate – normally between 1.5% and 5% of the invoice total
• The length of factoring period – how long it takes the customer to pay and clear the invoice
• The number of invoices your business wants to factor – typically, the more invoices, the cheaper the rates
• The invoice totals – factoring fewer invoices of larger sums is generally more cost-effective than factoring several smaller invoices
• Your business’s industry and the posed ‘risk’ – e.g. factoring rates for recruitment businesses is typically quite low as this is a low-risk industry
• Your business’s longevity and turnover – these will also be considered as an indicators of risk to the factoring company
• Other various fees, such as origination fees, incremental fees and service fees – which ones will apply to your business must be checked with your chosen provider

The information on this page should help you to understand invoice factoring better, and it should also help you to understand exactly what you will be paying for. To find the exact prices that you will be paying, you should speak to as many suppliers as possible – we can help here.

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