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Invoice Finance - How Much Does It Cost

How Much Does Invoice Factoring Cost?

Invoice Factoring - The Basics

Invoice Factoring is a business finance product designed to improve the cash flow of a business.  Generally Invoice factoring services are provided by major financial organisations such as well-known banks but there are a number of independent finance companies offering this service too.   The basic principle of invoice factoring is that you use your invoices as a business asset and sell these to a third party or factor.  The factoring company usually advances funds to between 70-85% of the value of the invoices.  The factor will collect the invoice payment from your customers and then forward you the balance less any service charges.

Invoice Factoring - When Would Your Business Use It?

Invoice factoring is ideal when your business wants to improve its cash flow.  Perhaps to invest in sales growth, buy machinery or simply pay suppliers.  It is ideal in industries that historically have a lengthy payment period, such as manufacturing where payments can be as long as ninety days or more, and where business costs are comparatively high.

Businesses of all sizes utilise invoice factoring to ensure that they can promptly meet their own financial commitments, such as wages, rent and production costs, even when their own customers pay more slowly.

A further benefit to SME businesses without a specialist credit control or ledger management is that with an invoice factoring service they will take responsibility for your customer payments.  This means that invoice factoring is a valuable source of business finance and a debt collection service in one solution.

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What's Invoice Factoring Going To Cost?

Clearly different invoice factoring companies will have different costs and levels of charges.  This can mean that it's difficult to make comparisons between various providers.  However an invoice factoring agreement can include:

Interest Charges or Discounting Fees - As with other sources of business finance interest is charged on the amount of money made available to you.  Invoice factoring is a loan using your invoices as the collateral for the funds.

Factoring Service Charges - These are usually based on the turnover of the business and the number of invoices generated. The fees are used to offset the cost of administrating your sales ledger and debt collection.  The service fees can be a significant amount of money over the course of a factoring agreement.

Credit Insurance Premiums - Credit insurance is used to insure you against your customers defaulting payment so that you don't have to pay back monies advanced.

Arrangement Charges -This is the fee charged to set-up your invoice factoring facility although not all factoring companies make these charges.

This list is not a definitive list of charges.  Not all invoice factoring companies use these charges and there can be other fees charged for as well.  Please see our Buying Guide to Factoring for additional information.

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