What is the cost of invoice discounting?
Thursday 3rd February 2022
Invoice discounting is the practice of raising money against the value of your sales ledger. Nowadays, approximately 1% of all UK businesses use an invoice discounting facility - and with good reason too!
Invoice discounting provides ready access to capital that can be used to improve your business' cash flow and finance sustainable growth. It’s often 100% confidential and it enables B2B companies to invest in assets, employees and stock without worrying about stretching their cash reserves or exposing themselves to financial distress.
Invoice discounting also provides a fantastic alternative to costly business loans and other forms of lending, but research from the Asset Based Finance Association (ABFA) shows that a significant number of medium-sized, B2B companies avoid invoice discounting facilities because they’re worried about the cost. Research from the ABFA also shows that a lot of business owners worry about hidden fees and penalties for bad debt.
So how much does invoice discounting actually cost? The answer to that question does depend on your provider and the terms of your discounting agreement, but we can take a look at some of the costs that are normally included, and give a rough idea of the general cost.
Find out how much invoice discounting would cost your business using our calculator
What are Invoice discounting rates?
The first, and most obvious cost is going to be the service or management fees. You pay these fees to maintain your financing facility and cover the costs of administering your accounts. They’re normally paid on a monthly basis, and the full amount normally depends on:
- Your annual turnover
- The number of customers in your sales ledger
- The number of invoices that you typically issue
Luckily, invoice discounting fees tend to be much lower than the fees associated with a service like invoice factoring because you’re still expected to collect debts yourself, and you don’t need to cover the cost of your provider’s credit control services. For most medium-sized businesses, service fees range from 0.2 - 0.5 percent of annual turnover and you should expect your provider to adjust them every year.
Aside from service fees, you’ll also need to pay a discount charge for every invoice that you finance. Discount charges work a bit like the interest on a bank loan, and they’re normally set at a pre-defined percentage of your invoices’ total value. You should expect to pay between 1.5 - 3% over base rate (per invoice) but the exact number will depend on the exact terms of your facility and it can vary between providers.
Are there any hidden fees or costs?
Providers aren’t in the habit of charging hidden fees, but some invoice discounting facilities may involve an additional charge for credit protection. You see, there are actually two discrete types of invoice discounting:
- Recourse arrangements, where you take responsibility for any bad debt
- Non-recourse arrangements, where the provider swallows the cost of any unpaid invoices
Using non-recourse discounting, you may be expected to pay a small credit protection fee to cover the provider’s liability. Generally speaking, credit protection fees are set depending on the perceived risk and they are generally very small.
