Last updated on December 16th, 2021 at 10:01 am
Lets explore whats the costs of factoring are and how much is may cost for a business to use factoring.
What Are The Costs Of Factoring?
Different banks and factoring lenders will charge in different ways for a facility. There is no set way of charging but there are common charges associated with taking out a factoring facility.
Here are the most common costs for an invoice factoring facility:
- Setup/Arrangement Fee – Some Factoring lenders charge a set up fee, although not all. Whether or not a set up fee is charge will vary between lenders and may depend on the complexity of the case. Typical set up fees might be between 1-2% of the facility limit.
- Service Charge – This usually accounts for the majority of the costs of a Factoring facility. The service fee is usually charged as a percentage of your invoices/turnover. This would commonly range from 0.5 – 3% and is often subject to a minimum monthly charge.
- Interest/Discount Fee – As well as the service charge, any money advanced under the facility will usually incur interest. This would typically be 3 – 5% per annum, calculated daily.
Other Potential Fees
- Bad Debt Protection (BDP) – This is usually optional and is to cover invoices against non payment. This may also be referred to as recourse or none recourse factoring. A Credit Insurance policy would usually remove the need for BDP.
- Refactoring Fee – This is only charged when a invoice remains unpaid after an agreed approval period, usually 90 days.
- Credit Note Fee – A factoring facility may or may not include a fee for processing a credit note.
- Annual Review/Renewal – Some lenders may charge a annual renewal or facility review fee.
- Survey Fees – Its also worth double checking if a lender requires mandatory surveys and if so what cost (if any) they may charge.
As mentioned earlier, costs/fees can vary significantly between banks and specialist invoice factoring lenders.
It is worth seeking the help of a professional invoice factoring broker to help negotiate on your behalf.
Things That May Influence The Cost Of Factoring
- How Much You’re Borrowing
- The Quantity of Invoices
- Your Particular Industry or Sector
- Your Client’s Credit Score And Worthiness
- Your Own Credit Risk & Score
How Much Does Factoring Cost?
Lets take an example and look at how much an Invoice Factoring facility might cost for a £1 million turnover business.
This is a real life example from a facility we have set up in the past.
- Projected Turnover: £1,000,000
- Funding Limit; £125,000
- Invoice Funding Percentage: 90%
One off fees
Set Up fee: £500
On going fees
- Service Fee: 0.75%
- Interest Rate: 3% + Base
If all turnover goes through the facility then:
Service Fee: £1,000,000 x 0.75% = £7,500 Per Year
Interest Rate: £100,000 balance (3.1%) Approximately £8.50 Per Day
Find Out The Costs of Factoring For Your Business Today?
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More Invoice Factoring FAQs
- What Is Debt Factoring In Business?
- Debt & Debtor Factoring Definition In Business
- What Are The Costs Of Factoring? How Much Does Factoring Cost?
- Factoring vs Leasing
- Factoring vs Invoice Financing
- Are Factoring Fees Tax Deductible?
- How Can Factoring Help A Business?
- How Do Factoring Companies Recover Funds?
- Is Factoring A Loan?
- Is Factoring Considered Debt?
- Is Factoring Invoices A Good Idea?