Invoice Finance offers a flexible approach to securing funding fast for your business. The typical fees involved, often called the discount rate, are very reasonable, with an industry average that industry average varies between 1.5 – 5 percent of the total value of the factored invoices every month.
Let’s explore the full costs and charges at every step of the process.
What is a Typical Charge for Invoice Factoring?
Invoice factoring offers a flexible approach to securing funding fast for your business. The typical fees involved, often called the discount rate, are very reasonable, with an industry average that industry average varies between 1.5 – 5 percent of the total value of the factored invoices every month.
Watch Out for Hidden Fees
There are a number of other fees that may be applied with invoice factoring companies. These may be in addition to or replace a portion of the discount rate. Most factoring companies will list these fees in the documentation you sign at the outset of your relationship, and they can often be quite reasonable as factoring companies want you to be as aware of them.
Here’s a rundown of other potential fees a factoring company may charge. Always feel free to ask about each one and whether it’s applied. You don’t want to overlook any potential additional fees.
Invoice Factoring Fees Explained
Application Fee
This is the fee that helps to begin the process. It’s important to note that this fee doesn’t always appear in agreements. In industries where invoice factoring is used routinely and reliably, it’s fairly uncommon. In situations where the application process needs to be managed in some way, though, it’s expected, and the fees are very reasonably. For some companies – particularly those with a long history of factoring invoices – the fee may be waived entirely if it exists.
Factor Fee
The factor fee is a fee for each invoice processed. It will typically be somewhat low, but it may affect companies differently. A company that works with large invoices may not have to worry about this as much, since invoice factoring a certain amount for them will require fewer invoices. Then again, a company dealing with such large invoices may be looking for a larger immediate influx of cash. Either way, since such fees are usually fixed, the larger the invoices, the less a factor fee may affect you.
A factor fee can be more troublesome for a company working with a host of smaller invoices. That factor fee will get counted more times and accrue into a comparatively larger amount.
Because such a fee impacts companies differently, do the maths and figure out how it may impact yours before you sign on to any agreement.
Credit Check Fees
Obviously, background research is done on your business in order to ensure that a factoring company is taking a reasonable risk. There may be a fee associated with a check on your credit.
Similarly, if there are questions about the credit of some of your customers, the background research may trigger a credit check fee. This helps factoring companies safeguard themselves from businesses that may want to slough off someone they consider to be an unreliable client.
For instance: consider a business that knows a client has become insolvent and has recently defaulted on what he owes. They don’t expect a number of that client’s invoices to be paid, so they go to a factoring company and factor that client’s invoices. The factoring company pays out the advance rate – perhaps 80-percent of the total value of the invoices. Yet the factoring company then finds itself unable to collect on them.
It’s for this reason that credit checks on your clients are reasonable. If the factoring company had protected itself by gently researching a client, they wouldn’t have entered into a deal that put them at risk.
Mailing Fees
A factoring company may work as a Notification or Non-Notification company. Notification means they’ll communicate with the clients whose invoices have been factored as themselves. Non-notification means they’ll let your business handle all the communication, or they’ll act as a part of your business when communicating with clients.
If either of the choices that require a factoring company to communicate with your clients are chosen, they will often send mailings as part of that communication. Mailing fees are often rolled into the cost of doing business when a factoring company considers the initial discount fee, but sometimes they are kept separate. There are good reasons to keep them separate when the invoices being worked with are over a longer period of time, where more communication may be necessary.
There are a handful of other potential fees different factoring companies may apply. All in all, the way each does business or breaks costs down may be a little different from the next. Make sure the fees are reasonable for the agreements you’d like to sign, and you’re good to go. Don’t be afraid about asking about each of these if you’re unsure whether your factoring company will charge them or not:
An application fee is a gate to make sure businesses are serious about invoice factoring.
Factor fees are processing fees for each invoice.
Credit check fees help to protect the factoring company.
Mailing fees may be needed for a factoring company to communicate with your clients.
What Can Influence the Cost of Invoice Factoring?
While every lender has their own specific fee structure, certain factors about you, the borrower, will affect the deal you’re offered.
They are as follows:
- How much you’re borrowing – As with most areas of finance, the more you borrow the better deal you can negotiate
- The Quantity of Invoices – Since most factoring companies charge you for collection, fewer invoices of a higher value are preferential to lots of smaller ones.
- Your particular industry – Since factoring companies assess risks before deciding what rates to offer you, it stands to reason that certain industries come with higher levels than others. Recruitment, for example, is likely to be considered lower risk than construction.
- Your client’s reliability – The better your own clients financial standing and credit history, the safer any factor will feel in advancing you money against their invoices.
- Your own business standing – How long you’ve been trading; what your turnover is; and your own credit history all have a part to play establishing trust in the eyes of the lender.
