Invoice finance: What can you raise?

Find out how you can borrow up to 90% of your invoice value

Typically, factors will lend up to 90% of an invoice value. The words ‘up to’ are all-important. A lot depends on the terms of sale your company operates and the credit-worthiness of your customers. You may also not require the entire advance amount offered to you, so you can take any value up to the amount approved. If every sale is to a reliable customer (business-to-business), then you are quite likely to get up to 90% of the invoice value. If there is the potential to return some or all of the goods, or there is a history of late payment, the factoring company may reduce the percentage it advances. It must be highlighted that this depends on different factors, so each case is going to vary even if it is only slightly. Most factoring companies will lend hundreds of thousands, and even millions, to companies. Indeed, invoice discounting or factoring frequently form a considerable part of the funds used in management buyouts these days. For larger sums the smaller factoring companies might not be able to do the deal, but the larger ones will definitely be interested, which is a big hint to ensure you shop around when looking for a deal.

How much does it cost?

There are two cost elements typically associated with invoice finance. The first is the ‘service fee’. It covers the costs of having the facility including the admin and credit control within the invoice finance facility. This is charged as a percentage of your annual turnover, and can range from as little as a 0.1% to a maximum of 3.5%. It is unusual to pay much more than this. The rate of this charge usually depends on the level of your turnover with higher levels of turnover receiving the lower end of the service charge. So, if your turnover is under £1m, don’t be too surprised if you are charged around a 3-3.5% service charge. The second charge is the interest, or ‘discount rate’. This is a daily percentage charged against the money you have borrowed. So if you borrow £10,000 for 30 days through invoice finance, you may be charged between 4-6% on that £10,000 for each day that passes where the cash advance is not paid back. This works in a similar way to the daily charges occurring in an overdraft facility. This charge is only implemented when you are borrowing cash. Although the rates above should help as a general guide, it is important to remember that these figures can change with each individual business circumstance. This Invoice Finance Fee Calculator, by Touch Financial, shows you a basic breakdown of the average cost for invoice finance products. You can use your real business figures to get a fairly accurate guide on what you will be advanced and what you will be charged.

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If you have an annual turnover of around £50,000 or above, a factoring lender will consider your enquiry. A factoring company will provide you with an advance of a percentage of your invoice value and collect the debt for you. Although this saves your own admin costs, some customers may look at the lack of face-value with your own business and theirs negatively. To reduce the possible damage caused it is important that you are totally transparent with your customers by letting them know you are changing to a factoring facility.

By taking this approach, usually the business will understand and take no offence to your change in finance structure. They now know the new finance will maintain your own cashflow and keep you (as their supplier) healthy, so it should be a win-win.

Invoice Discounting

If your turnover exceeds around £250,000 a year, an invoice discounter is likely to consider your enquiry. This facility enables you to receive an advance on your invoice value but leaves you to maintain the credit control and collection facility to receive the payment from your customer. This allows you to treat the customer as you usually would, without them needing to know you have switched to a discounting facility.

Spot Factoring

If your business has a few significant customers you may want to take out spot factoring as opposed to a full blown factoring facility. Spot factoring targets only a few select customers which may be of higher value than the rest. They may require a project to be completed but will only pay you at the end of the contract. Normally, your business would have the cashflow available to fund the project, however, the scale of the costs involved in achieving the end project is too high for your cashflow. Spot factoring targets the specific invoice involved and advances you the funds from that invoice. The negative side of choosing a spot factoring facility is that the interest is usually higher than with a full factoring or invoice discounting facility. The positive is that you do not have to pay the monthly service charge which ties you into the full facility for a minimum amount of months, i.e. a three month contract plus. To sum these up: Factoring advances you the value of your created invoices and means you do not have to collect the debt from the customer as the factoring lender does it for you. Invoice discounting is similar to factoring but you are left in control of your sales ledger, which also means this is a confidential form of financing your business. Spot factoring is for businesses that don’t need to factor every invoice produced. You pick and choose individual invoices where the costs involved may be more significant than your standard, self-financing invoices. Even though you are not required to pay the monthly service fee, spot factoring does carry a higher interest charge.

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  1. The information regarding spot factoring is incorrect where it states that “Spot factoring targets only a few select customers which may be of higher value than the rest. They may require a project to be completed but will only pay you at the end of the contract”

    The better spot factoring companies are happy to fund applications for payment on part completed contracts which makes it a highly suitable financing option for construction subcontractors.

    Although the headline rates may be higher than those for traditional factoring interest you don’t have to submit an invoice for funding until you actually need funding so the overall cost may well be less

    Ian Johnston