Thursday 11st Jan 2018
What are the Costs of Invoice Discounting?
19 Jan 2018
For many businesses that are struggling with cash flow, the prospect of invoice discounting is a very attractive one. Rather than having to wait for 30-days, 90-days or perhaps even longer for clients and customers to pay their invoices, you can get the money straight away, which means you’ve got the cash to use as you please. Whether you’re having difficulties making ends meet, or you want the freedom to expand quickly, invoice discounting can be very effective. Of course, as with all forms of lending and other financial products, there is a cost associated with the service, which may mean that some companies are put off setting up an invoice finance account with a lender. In this article, we’re going to take a quick look at some of the main costs that you can expect, and how you can weigh them up against the benefits.
It’s firstly important to note that not all invoice finance providers are the same, and not all products and agreements are the same either. That means that this article won’t be able to tell you exactly how much invoice discounting will cost for your business and situation, but we can give a good idea.
Service & Discounting Fees
Generally, there are two main costs associated with invoice discounting, and they’re fairly straightforward. They might not be applicable in all cases, but they are the most commonly encountered.
The first cost that you’re likely to come across is the service fee, which is the cost of having the facility in the first place. Usually, it’s calculated as a percentage of your turnover, and the percentage is likely to change depending on the turnover too, so there can be fairly significant differences in costs here. This is the fee that’s most likely to vary between providers. It’s also often the case that fees for discounting will be lower than factoring, as there are fewer services being provided by the credit company. In most cases this fee is payable monthly, and is agreed either in monthly periods or on a rolling agreement.
You can see some example fees based on turnover for Hitachi Capital’s invoice finance products on this page.
The other cost is the actual discount fee, which is the cost of the borrowing itself. For each invoice that you receive an advance for, you’ll be charged a small finance fee (similar to the interest on a loan) which is usually a few percent. This is quite simply to cover the time between you receiving the funds, and the finance provider receiving the funds from the cleared invoice.
Aside from these two main costs, there can also be additional ones that will vary from lender to lender. For instance, in some cases there might be charges to end the agreement early, because some are agreed over fixed terms. There might also be additional services added on to the package that have other costs associated with them too, and in some cases there might even be an arrangement fee. Always make sure you know exactly what you’re looking at when making comparisons, because hidden costs can quickly add up. Try to use some example finances to see how much respective companies would cost.
Weighing Up the Costs
When it comes to deciding if the costs are worth it in the first place, businesses will need to get a rough idea of how much the financing of each invoice is going to be worth to them. In a great many cases, the cost of the facility is negligible compared to the potential costs of having poor cash flow, which is why invoice discounting is now used by thousands of UK businesses. Good cash flow can increase profits, and prevent the use of more expensive types of credit. It’s essential however to sit down and understand exactly how much the costs will be and whether they’re right for your business. This may mean that it’s worth consulting outside advisers.