How Much Does Invoice Factoring Cost in the UK? The Truth for SMEs

Invoice factoring is a type of invoice financing that enables you to access up to 85% of unpaid invoices. This is the most effective way to bridge the gap in cash flow when you have yet to receive accounts receivable. Invoice factoring is a much better option than a business loan, as you do not have to pay interest.

You are getting your unpaid invoices finances in exchange for some fees. Invoice finance companies in the UK normally fund up to 85% of the total unpaid invoice value, and the rest is offered after completing the collection from debtors, minus fees. Fees are never straightforward. Some businesses end up paying a lot more than they expected.

Why might you need to rely on invoice factoring?

It could be frustrating to wait for customers to pay back, especially when you are in urgent need of cash. You cannot ask your customers to pay you before their time, which means your business operations will struggle. However, sometimes customers take a longer time to make payments. A poor cash flow could be a real headache for you, especially if the payment term is as long as 30 or 60 days. It is improbable to manage a business for such a long time.

Here comes the role of invoice factoring. It helps you have immediate access to cash blocked up in invoices which are yet to be paid. You do not have to wait for days or weeks to get paid by your customers, as you can have invoices financed from an invoice factoring company.

Invoice financing is not an appropriate funding option for all types of businesses. Only if your business sells goods and services on credit will you be able to access this service.

• You can use invoice financing if you need money for your business expenses and your customers are slow payers.
• Your business has come up with a great opportunity that requires instant accessibility to working capital.
• A small business invoice factoring in the UK is also suitable when you are scaling up your business.
• You do not intend to employ a traditional business loan. The best thing is that invoice factoring does not consider your credit score. Further, it is not secured against your business assets. No personal guarantee is required.
• You do not intend to chase customers for collection. Invoice factoring is like outsourcing collection from your customers.

Here are some important facts about invoice financing:

• Invoice financing is not a loan, as you are not borrowing money which you have to pay back along with interest. You are getting financed for unpaid invoices. In other words, this involves speeding up the payment of invoices.
• Instead of yours, invoice factoring companies will check your customers’ creditworthiness. If they have a track record of delaying payments, it will turn against you.
• You will be responsible for bearing the loss of those who default.

Types of fees that invoice factoring include

Undoubtedly, invoice financing can provide you with instant cash and yet it is much cheaper than traditional business loans, but it does not imply that it is not subject to costs. Main costs that factoring includes are:

• Service fees and discount rate. The former is charged with providing administrative work, they will do for collecting money from your customers on your behalf. The maximum service fees could be up to 5%; however, each factoring company has their own service charge. An invoice factoring company will be completely responsible for chasing payments and handling customer queries.
• The latter is like an interest rate that is charged on a cash advance. These rates could be up to 5% as well. The longer your customers take to pay off, the higher the discount rate will be charged.

Other charges that factoring companies include:

Setup fees	Some providers charge as little as £100 and as high as £500. This is the cost for arrangements to make to start the collection.
Minimum volume fees	Some factoring companies charge minimum volume fees if the total value of invoices is less than their criteria.
Early termination fees	These charges might be between 1% and 3% if you want to end the contract before the schedule.
Late payment fees	Additional charges will be levied if your customers make default. This loss will have to be borne by you only.

The aforementioned fees are apart from the small cut that the factoring company will charge at the time of paying you an advance. No factoring company will ever fund the 100% value of invoices. It is capped at 90%.

The following table reveals the service fees and discount fees that factoring companies charge on different industries:

Industries	Service fees	Discount rate	Advance rate
Recruitment	0.5% to 2.5%	1.9% to 4.5%	85% to 95%
Manufacturing	1.5% to 3.5%	2% to 5%	80% to 90%
Construction	2.5% to 4%	2.5% to 6%	70% to 80%
Healthcare	1.5% to 3%	2% to 4%	80% to 90%

Ways to reduce invoice factoring cost

Here are some ways to reduce invoice factoring costs:

• Shop around. Try getting at least three quotes so you can negotiate.
• If you do not need cash for all invoices, consider selective invoice finance to avoid getting into long-term contracts.
• Make sure that your customers have decent credit scores. This will help you avoid paying hefty fees.
• Try negotiating for the discount rate.

To wrap up

Invoice factoring costs depend on multiple factors. In addition to service fees and discount rates, there are other charges that are levied too. Receive multiple quotes and then choose a factoring company that advances money at the most attractive rates.