Does Cheap Invoice Finance (Factoring / Invoice Discounting) exist?
Does Cheap Invoice Finance exist? The answer is Yes and we include both Factoring and Invoice Discounting in this answer.
We are often asked this question so thought we would share our experience of over 17 years in the Invoice Finance sector.
The question we ask our Clients is what they are using as a comparison to decide if something is cheap or not?
To understand cheap we need to consider the alternatives:
Invoice Finance is often perceived to be an expensive form of borrowing. In reality it can be one of the cheapest, however, it is often compared against other forms of funding which is misleading.
Let us explain – Invoice Finance in itself is a singular finance product and should only be compared against other products from the same product type. In reality it should be the scenario of “comparing apples against other apples”.
With over 17 years’ experience in the sector we have conducted hundreds of meetings and the majority of Clients compare Invoice Finance against other forms of funding such as overdrafts, loans, asset finance etc. This in theory is comparing an apple against a lemon; both are still fruits but are not the same so should not be used as a comparison. We have used the analogy over the years of comparing a car against a bicycle; yes both will get you to the same location but both have their own costs, features and benefits.
Invoice Finance includes extra services such as providing funds in advance against invoices, the option of a credit control service (Factoring) and the possible inclusion of Credit Protection (cover against bad debts). These additional services are not provided by an overdraft or loan and therefore additional services often include additional fees.
So how cheap is Invoice Finance?
We are often asked about the cost of Invoice Finance and this is often very difficult to answer. The reason why it is difficult to provide an exact cost is that there are so many variables to consider and that no two businesses are the same. This is one of the main reasons why there are no major comparison sites to use when looking for Invoice Finance. A good commercial finance broker like ourselves should be used instead of a comparison website as we know the market very well and can provide a FREE comparison service on your behalf. This will save you a lot of time by letting us look at the different options.
The variables which can help you get Cheap Invoice Finance.
Please find below some of the key variables lenders across the country use to ascertain the costs for Invoice Finance.
- Turnover – A new start up business should not be expecting to receive the same pricing as a business which has traded for say 10 years or over. Lenders will base their pricing on the risk profile of the business. If the business is a new start up then it is likely to have no credit rating and therefore like any other forms of funding will attract the higher Finance rates.
- Business Credit Profile – As with most lending products the better the credit rating of the business then then better rates that can be obtained. Invoice Finance is no different, if there are CCJS and Defaults then expect to see a price increase over a business with a clean credit history.
- Business Debtor Profile – At the end of the day this is what the lenders in the UK are more interested in. This is a key variable for any lender to consider. This variable is how the lender will get repaid for the borrowing the business takes and so is strongly reviewed. In essence all the lenders will do is complete a credit check on the debtors to see their credit worthiness and then depending on the credit score will allow a level of funding to be released against each specific debtor. The better quality the debtor then the cheaper the rates will be as this reduces the risk to the lender.
- Volume of Debtors – This is one variable that is often overlooked. A business with one debtor is easier to manage for the lender versus a business with say 100 or more debtors. It would therefore be expected that the lower the debtor volume the cheaper the Invoice Finance facility will be. In reality this sounds plausible, however lenders perceive lower volumes of debtors to be a risk to their funding as the potential impact of debtor failure to the business is greater.
- Export Debtors – If your business has export debtors within the sales ledger then most lenders (99%) will insist on the use of a Credit Protection policy. This can either be taken out with the lender or can be taken out independently. (We can arrange for quotes to be provided) which would obviously add additional costs to the overall price.
- Personal Guarantees – This is not always an obvious one to look at, however, if the directors are able to offer larger supported Personal Guarantees this may have an impact of lowering the total cost.
- High Street Bank v Alternative Lenders – Any alternative lender will confirm that they cannot compete with the High Street Banks on Invoice Finance costs. If they can say they can compete then walk away. It is a known fact that High Street Bank funding is the cheapest and this will always remain the case. The issue arises in the fact that High Street Banks can be very selective with who they provide facilities to and so not every business meets their criteria.
Why Invoice Finance can be cheap.
In the main lenders see Invoice Finance as more of a structured product in that the funding they provide is secured against a physical asset (The debtor book). The majority of lenders in the UK also apply a Fixed and Floating debenture against the business so that in reality they are also securing their borrowings not only against the debtor book (which they are funding) but against all the other assets in the business. This means they may have additional assets to call upon in the event of a default.
The cost of Invoice Finance is reflected on whether or not a lender feels that their funding is safe.
Myths of Invoice Finance.
Expensive – This is covered above and is partially down to the fact that Invoice Finance is being compared against something completely different. Let’s say your Invoice Finance costs are 5% per invoice (this is the top end that any business should pay) and your turnover is £250,000 then the total
Invoice Finance cost would be calculated at £12,500. If your business was to employ a full time credit controller working 52 weeks a year (no holidays, no sick days) would this be worth £12,500 per annum on top of getting up front funding against your invoices. The answer would be yes – so in theory Invoice Finance now becomes cheap.
A quick search on Reed.co.uk shows the average salary for a credit controller to be around £20,000 per annum. If you factor this cost into the overall equation then it can be work out more cost effective to use Invoice Finance (Factoring)
In reality the opposite could be said that if your turnover is £1,000,000 and you pay 5% per invoice then the total cost is £50,000 which is far greater than the £20,000 salary for a credit controller. In reality if your business was turning over £1,000,000 of invoices then your Invoice Finance costs would be sub 1.5% per invoice (or £15,000 pa) and therefore still works out to be cost effective.
Once in place it is hard to exit – This is not true. Invoice Finance is a financial product and like any other funding products can be terminated and cancelled per the terms of the funding agreement. If your business is used to getting paid within 24 hours rather than waiting weeks or months would this be something that your business would give up easily? Many businesses choose to remain using this type of funding as it is more convenient and meets their trading requirements.
Is Cheap always the best?
Every lender and their situation are different. The analogy about you getting what you pay for very much stands out in the sector. If you are looking for a full service with bells and whistles then unfortunately like anything else you will have to pay for it.
Over the years we have come across many businesses who have switched lenders for a cheaper alternative only to switch back as they felt as though they was not getting the service they had previously received. Over at All Star we know the service levels of our lending panel and therefore can advise on whether or not there would be any benefit to switching.
Why use an Invoice Finance broker?
All Star Funding Solutions have over 17 years’ experience in the Invoice Factoring / Invoice Discounting sector and we work with all the key lenders in the UK. We are completely independent and use our experience to not only identify the perfect solution but to help bridge the gap between the lender and business.
All Star Funding Solutions is also able to negotiate better rates on behalf of the business and we are confident of reducing the fees on every business we work with. In fact we have a 100% record in 2017, 2018 and so far in 2019 of reducing the costs on every business we have worked with.
If you are looking to switch lenders this is our key specialty. We have helped switch a large number of facilities in our time and all our lenders follow the ABFA code of conduct for switching facilities.
Our personal approach means that we are available as and when required to help minimise the impact of the transfer process.
If you are interested in finding out more about Invoice Factoring / Invoice Discounting please click on the link below
or give us a call on 0161 8211478 for a confidential discussion.