Invoice factoring costs SMEs
Factoring and invoice discounting services are based on annual turnover, after an assessment of your company’s financial position by your chosen provider. Invoice factoring costs for SMEs can be a major issue in choosing a provider.
This is not to say that if your turnover does not meet the limits, there will not be a solution to help your business release more cashflow through invoice factoring – it may be that a Single Invoice Factoring solution might be suitable, for example, whereby invoices for one customer form the basis of your factoring arrangement.
However, invoice factoring costs can be crucial for SMEs, especially when cashflow is already tight – and it is important to consider the figures as well as the facts before proceeding.
Invoice Factoring Costs for SMEs – The figures
The UK government has recently acknowledged the issues that SMEs are facing in the current financial climate and initiatives like Project Merlin have been introduce to help SMEs obtain more funding.
Invoice factoring costs for SMEs are based on turnover, with a percentage of the value of the invoices used for factoring being paid to the factor – and a monthly service fee being charged for the service.
In the UK, the limits for minimum turnover are:
- Generally a minimum £100k-£200k turnover for any factoring and/or invoice discounting arrangement in the UK
- Usually a £500k minimum turnover for Invoice Discounting services
- Export Invoice Factoring may be limited to companies with a turnover of £100k, but this can include domestic turnover
- No one customer must account for more than 40% of your sales ledger
- Generally the higher the risk your business is – or the higher the risk involved in the invoice factoring arrangement – the greater the costs will be to your business.
Charges for factoring : how much will an SME pay for Invoice Factoring?
The current costs for factoring or invoice discounting services are roughly:
- Finance charges for Factoring or Invoice Discounting arrangements currently are normally between 1% and 3% above the bank base rate
- Monthly service fees for administration are based on turnover and will be usually range between 0.5% and 3%, depending on volume of invoices and customers, as well as risk
- Invoice Discounting fees usually range between 0.2% and 0.5%, depending on domestic turnover
- Non Recourse Factoring will attract a credit protection fee, normally ranging between 0.5% and 2% of turnover
- A Refactoring Fee may also be charged for collecting aged debts when a customer fails to pay.
How much will an SME receive from Invoice Factoring?
What are really the invoice factoring costs? If you opt for a factoring or invoice discounting solution to your cashflow issues, you can usually expect to receive between 90%-95% of the value of your invoices, with 75%-85% payable within 24 to 48 hours and the remaining sum paid after collection, minus the finance fee.
Invoice factoring costs :
- As well as paying a percentage of the invoices to the factor or invoice discounter, your business will also be charged a monthly service fee – usually up to 3% of turnover
- In the case of Non Recourse Factoring, you will not have to repay the money forwarded to your business at a later stage (it will be up to the factor to collect this); but you will probably have to pay a larger percentage of the receivables as a fee once they are paid, plus the monthly service fee
- Recourse Factoring involves your business retaining liability for the monies being collected – if a customer fails to pay, the factor can ask you for the money after a set period of say, three months – making this type of factoring cheaper, but with more risk for your business if customers do not pay
- If you opt for an Invoice Factoring arrangement, you might find that your bank reduces your overdraft facility as, in effect, your borrowing risk has increased. If you rely on your business overdraft for your working capital, this is one issue that must be considered.
Are you looking for the cheapest invoice factoring costs? If you would like more help getting started with a business plan involving factoring or invoice discounting, our agreed suppliers can offer free quotes without obligation within 48hours, to give you some idea of the benefits invoice factoring could offer your company.
Our agreed suppliers specialise in solutions for SMEs and will be able to advise you on the best way forward when considering cash acceleration using factoring or invoice discounting.
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