What are the costs of invoice discounting?
Tuesday 4th January 2022
If you’re one of the 60% of British businesses that struggle with cash flow problems, the prospect of invoice discounting is probably a very attractive one. Rather than having to wait for 30-days, 90-days or perhaps even longer for clients and customers to pay their invoices, you can get the money straight away, which means you’ve got the cash to use as you please.
There are of course invoice financing rates and charges associated with invoice discounting services. In this article, we’re going to take a quick look at some of the main invoice finance costs that you can expect to pay, and how you can weigh them up against the benefits of invoice discounting.
Note: Not all invoice finance providers are the same. This article won’t be able to tell you exactly how much invoice discounting will cost for your business and situation, but we can give a good idea.
Invoice financing rates - how much am I likely to pay?
Generally speaking, there are two main invoice financing costs associated with invoice discounting, and they’re fairly straightforward.
1. Service fee
The first invoice finance charge you’re likely to come across is the service fee, which is the cost of having the facility in the first place. Usually, it’s calculated as a percentage of your turnover, and the percentage is likely to change depending on the turnover too, so there can be fairly significant differences in costs here.
Invoice financing fees are most likely to vary between providers. It’s also often the case that fees for discounting will be lower than invoice factoring charges, as there are fewer services being provided by the credit company. In most cases this fee is payable monthly and is agreed either in monthly periods or on a rolling agreement.
Find out how much invoice discounting would cost your business using our calculator
2. Discount fee
The other cost is the actual discount fee, which is the cost of the borrowing itself. For each invoice that you receive an advance for, you’ll be charged a small finance fee (similar to the interest on a loan) which is usually a few percent. This is quite simply to cover the time between you receiving the funds, and the finance provider receiving the funds from the cleared invoice.
3. Additional costs
Aside from these two main invoice financing costs, there can also be additional ones that will vary from lender to lender. For instance, in some cases there might be charges to end the agreement early, because some are agreed over fixed terms. There might also be additional services added on to the package that have other costs associated with them too, and in some cases there might even be an arrangement fee. Always make sure you know exactly what you’re looking at when making comparisons, because hidden costs can quickly add up. Try to use some example finances to see how much respective companies would cost.
Invoice discounting costs - are they right for my business?
Deciding whether rates are right for you will mean making a business case for the invoice discounting facility. Find out how much benefit your business will receive by having invoices paid instantly, and then balance this up against the costs that you’ve been given when comparing and getting quotes from providers.
Good cash flow can increase profits, and prevent the use of more expensive types of credit. It’s essential however to sit down and understand exactly how much the costs will be and whether they’re right for your business.
