Invoice factoring has grown from being a largely unknown business finance option to a popular way of improving cash flow without getting into long term debt.
However, a lot of users don’t know that much about it – particularly the cost. While it’s often a more affordable form of finance, that’s not always the case.
It pays to dig a little deeper to understand exactly how much invoice factoring costs.
Factoring rates can drive up the cost of finance considerably, and there are a range of ways rates are influenced. Be clear on exactly how much using invoice factoring will cost from the beginning and read through the agreement in full to ensure you don’t get hit with unexpected charges.
Invoice factoring helps businesses to improve cash flow by essentially providing prompt payment of invoices. Many businesses have to wait a month or more for customers to settle their accounts, all while covering running costs from their own bank account.
By selling invoices for cash now, businesses are better able to meet costs and invest in their own growth.
There are a few different forms of invoice-based lending; invoice factoring is just one. Invoice financing, discounting and accounts receivables (AR) financing are other names for borrowing – some are essentially the same, while others are slightly different. As with invoice factoring rates, often it depends on the provider.
Read more: An overview on invoice financing
Receivables factoring rates are not the only cost of borrowing. The total cost of factoring includes any additional fees that you’ll be charged.
Factoring companies commonly charge a combination of account, subscription, membership, administrative and other fees that can add up significantly over a period of time. Many factoring providers don’t charge interest on lending, but some do. Late fees can be significant too.
Invoice factoring rates can be determined by a range of features. For businesses looking into factoring, it’s often worth researching a few different options to find the best value for money, but also to see why different arrangements come with different price tags.
The cost of any business activity is important, and getting a deep understanding of exactly how much it’ll cost is one of the crucial things to know about invoice financing.
The average invoice factoring rates tend to be around 5-10% of the value of the invoice with all fees considered, but the way lenders arrive at the cost can differ dramatically.
There are four common types of invoice factoring rates that providers charge.
The easiest fee to figure out, a flat fee rate is a one-time cost for the borrowing. The fee is the same regardless of when you pay back the loan, which makes it easy to budget for and manage.
Split fees start with a flat initial cost that increases incrementally after set periods of time – usually in 10 or 15 day blocks.
For example, the fee may be 5% of the invoice if it’s paid back within 15 days. Every 15 days after that, the fee increases by 1%.
Plainly, the faster you can pay back the balance, the cheaper the finance will be. This form of factoring is best suited to businesses whose customers pay invoices promptly.
As the name suggests, a daily fee is calculated every day the borrowing is outstanding. Pay attention to the rate of fee increase – it often increases by the same amount each day, but it doesn’t always.
This form of factoring can be even cheaper than split fee factoring for businesses who can pay it back quickly.
Prime plus rates tend to be better suited to businesses with large receivables, as it can end up acting like a more traditional form of business finance.
Rates are calculated daily, and comprise a prime rate on top of a base annual rate. For example, if the prime rate is 3% and the base rate is 4%, the total rate will be 7%. Prime plus rates often have administrative fees as well.
This is where things can get interesting. Almost all providers with charge a range of other fees. This can significantly drive up the cost. Some fees will also lock you in or will still be charged even when you don’t need the finance. These fees can include large establishment fees, administration fees, system fees, collection fees, early repayment fees, invoice submission fees, fixed monthly fees and late payment fees. Check the fine print to know your true cost! It often pays to go with providers that charge one simple fee.
Invoice factoring typically comes in two stages – the first amount is the advance you will receive – usually between 75-90% of the invoice value. The second amount is the leftover balance once the customer pays the invoice (less factoring fees).
Accounts receivable factoring rates can depend on your advance in four key ways:
As a borrower, you may not be able to negotiate terms and rates with the factoring service. However, if you’re going to be a long term customer that will generate good business for the lender, then you’ll have more power to arrange a cheaper rate.
There’s no “right way” of applying factoring fees, though the more reputable providers will be happy to provide a breakdown of what rates represent and what you’re actually paying for.
It may not be everyone’s idea of fun, but it’s worth reading factoring agreements to fully understand what you’re agreeing to.
Ask factoring providers about what fees they charge, how much they are, and when they’re payable. There may also be hidden fees that aren’t expressly included, but that drive up AR factoring rates.
Additional fees can include:
Accounts receivable factoring rates can vary from one provider to the next. Whatever the arrangement is, ask for a clear breakdown in exactly what you’re paying for.
While the benefits of invoice financing for businesses are clear, you should be clear on how much it’s costing to realise those benefits.
For a flexible invoice financing solution that doesn’t incur regular fees, check out FundTap. FundTap has no system, admin or account fees, it’s free to open an account, and businesses are only charged for invoices you submit to be financed.
With only a single fee that starts from 4% of the invoice value, FundTap helps to keep the cost of borrowing down, while empowering business owners with a cash flow solution that’s available when you need it.
Find out more about how FundTap works today.