Invoice Finance Costs
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What is invoice finance?
Invoice finance is a type of business finance that is used to improve the cashflow of B2B businesses that operate on delayed payment terms.
Invoice financing allows you to release funds from the unpaid invoices that have been raised, but are not yet paid.
There are two main types to consider, invoice factoring and invoice discounting.
How does invoice finance work?
Invoice finance works as follows:
- Invoice issued – You send an invoice to your customer and also send a copy to your invoice finance provider.
- Funds paid – Usually within 24 hours. Most funders pay within 24 hours, and up to 95% of the invoice amount.
- Balance paid – Either your business or your funder (depending on the type of facility chosen) chases the invoice, and once settled, you receive the balance, minus your agreed cost of finance.
The process then continues on an ongoing basis as new invoices are raised and old ones repaid.
Invoice finance costs explained
The costs of invoice finance can be broken down into just a few fees and charges. They are the service fee, the factoring or discount fee and, where included, bad debt protection.
Here’s an explanation of each cost:
Service fees
Think of this as an annual fee for keeping the facility alive. This fee is usually 0.5-1% of the total facility limit.
Factoring fee/Discounting fee
This fee is the cost of financing each invoice and is paid each time funds are borrowed or repaid.
The cost of this is dependent on the amount borrowed, the lender chosen, your industry and the strength of your customers.
Bad debt protection
Bad debt protection is an add on that enables you to still get paid, even if your customer fails to settle their invoice.
This is an additional cost that will increase the overall cost of your facility, but if you’re concerned about the impact of non-payment, then it may be a cost worth paying.
How can I reduce my invoice finance costs?
There are 2 ways to reduce your costs, either by reducing your advance rate – the percentage that you borrow against each invoice or by getting a more competitive deal on your current factor rate.
As with any finance facility, it is a good idea to regularly review your facility to make sure you’re not overpaying.
The easiest way to do this is by using the ABC Finance invoice finance comparison tool.
Our tool allows you to input your business details and invoice finance requirements, and within minutes, the market’s leading lenders will begin competing for your business.
Each lender offers their most competitive terms, in an attempt to win your custom.
Once you’ve received an offer that you’re happy with, simply progress your application in a single button click.
Of course, our technology is backed by a team of experts who are on hand to support you through the application process and ensure you’re getting the best possible deal and only working with lenders who offer the highest possible service standards.
