What is Invoice Factoring?
Factoring Made Simple – Invoice Factoring is a relationship when a Client (Business) sells its invoices to a Lender (third party). In return the Lender will agree to advance an agreed percentage of the invoice in advance which is known as the prepayment. Consequently the funding made available by the Lender can be used to assist with a Clients cashflow. With Invoice Factoring when the debt becomes due the Lender will then undertake the credit control function to collect in the debt.
What is the difference between Invoice Factoring and Invoice Discounting?
Invoice Factoring is a process where the Lender is responsible for the credit control function to reclaim the amounts due from a debtor. This is the key difference between Invoice Factoring and Invoice Discounting. Invoice Discounting has the same benefits as Invoice Factoring, however, it does not come with a credit control function and therefore the debtors should be unaware that the invoices have been funded by a Lender. As there is no contact made by the Lender to the debtors this type of service is often referred to as Confidential Invoice Discounting.
How much does a Factoring company charge?
For the most part there are a number of parameters which a Factoring company will use to calculate the charges of a Factoring facility. The key items for consideration are
- Risk – All lending is provided with a risk and each funder will ascertain the risk profile of their Client. The higher the risk the higher the charges will be
- Workload – All funders will look at the debtor profile and will charge fees accordingly. The fees will be lower if the workload is lower eg a debtor profile of 5 debtors compared to one with 5,000 debtors.
- Experience – The length of trading time will have an impact on cost. A funder will prefer a Client to have experience of trading over a new start up business. This links to point 1 where the risk will be higher for the new start up business – therefore leading to higher charges.
In our experience a very experienced business trading at £10million per annum could expect to pay c0.10% per invoice, however, a new start up business could be expected to pay up to 5% per invoice in fees.
How do Invoice Finance companies make money?
To summarize the Invoice Finance Company makes their money by charging an agreed percentage against any invoices they agree to fund. For this purpose this is known as the Service Charge. The Invoice Finance Company will also make additional charges for any sums borrowed and any other costs incurred to administer the Invoice Factoring account. E.g prepayment charges, increased facility charges etc. The fees are usually taken on a monthly basis which allows a Client to budget accordingly. To conclude most Invoice Finance Companies if not all provide online access to the account. In short this will show how the account is performing and what fees are payable.
Finally if you are interested in Invoice Factoring or Invoice Discounting please click on the link below.
In addition our other specialist areas of funding are
- Asset Based Lending
- Asset Finance
- Business Loans
- Cashflow Finance
- Invoice Discounting
- Construction Finance
- Trade Finance
- Stock Finance
- Credit Insurance
For further info on Factoring see Wikipedia