What are the costs of invoice factoring.
Individual Agreements
Invoice factoring costs are usually based in an individual agreement with a factoring company. They will depend on the volume and amount of invoices that need to be factored, the value of the factoring facility as well as the type and kind of factoring that is required.
When you set up an invoice factoring facility the factoring company will create an internal account for you within their system. You don’t automatically receive the money from a submitted invoice; instead your account is credited with the amount. Just like a normal bank account this is where amounts are credited and debited. You will also use this account to draw down monies available to your business bank account as and when the balance allows and you choose to do so.
The costs generally split down into the following elements:
The interest on outstanding balances
Once a factoring company has paid out for an invoice then this amount is essentially borrowing and as such attracts an interest rate. You can expect to pay between 0.5 and 3 % above base rate on the total outstanding balance within your factoring account. Interest is usually calculated on a daily basis.
Management & Credit Fees
In addition to the interest on the money you’re paid from the factoring company, you will also have to pay a credit or management fee. This is based on the amounts and numbers of invoices that you factor with the company. This will be pre arranged with your factoring company and become part of the contract. Expect to pay between 0.75% and 2.5% of the invoice value depending on your arrangement.
Invoice Discounting Costs
Invoice discounting poses less of a risk to the factor so you can expect to pay less for the management and credit fees. This can be more in the region of 0.2% to 0.5% of the invoice value.
Bad Debt Protection Charges
If your invoice factoring agreement includes a level of bad debt protection then there will be an additional charge to pay on the invoice value. This is levied to take into account the risk that the factoring company is taking by shouldering the bad debt liability. The amounts can vary and are based on the factors assessment of the level of risk your account poses from a bad debt point of view. It is not uncommon to pay between 0.5% to 2 % of the invoice total.
In Total
Overall the amounts can add up, so for a complete non-recourse factoring agreement with bad debt provision you are looking at 4-5% of the invoice value in management and bad debt protection as well as the monthly interest of 3% above base rate.
General rule of thumb when planning cash flow and business growth is to allow approximately 10% of the invoice value as the costs of the invoice factoring.
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