What does invoice finance cost? Understanding the charges

One of the first questions any business owner asks about invoice finance is what it costs. The honest answer is that it depends, but the structure of the charges is fairly consistent, and understanding it makes comparing quotes far easier.

The service fee

The service fee, sometimes called the management or administration fee, is usually expressed as a percentage of your turnover put through the facility. It covers the provider's administration and, in factoring, the credit control and collections service. Because factoring involves more work for the provider, factoring service fees are typically higher than for discounting.

The discount charge

The discount charge is effectively interest on the funds you have drawn. It is usually set as a margin over a reference rate such as the Bank of England base rate, and is calculated on the amount advanced for the period it is outstanding. If you draw less, or your customers pay quickly, the discount charge falls.

Minimum fees and other charges

Many facilities carry a minimum annual service fee, so it is important to understand what happens if your turnover through the facility is lower than expected. Other charges you may encounter include:

• Set-up or arrangement fees
• Charges for bad debt protection on non-recourse facilities
• Audit or survey fees
• Fees for same-day payments or additional services
• Termination or exit fees if you leave within a set period

Why costs vary

Pricing reflects the provider's view of risk and effort. A business with a spread of creditworthy customers, clean invoicing and good records will generally be priced more keenly than one with concentrated debtors or a history of disputes. Sector, turnover and the type of facility all play a part.

How to compare quotes

Headline percentages can be misleading. A low service fee paired with a high minimum, or a keen discount margin paired with restrictive advance rates, may not be the best deal overall. Compare quotes on the total annual cost for your realistic level of usage, and check:

• The advance rate and any concentration limits that reduce availability
• The notice period and what it costs to leave
• What is and is not included in the service fee
• Whether any personal guarantees or additional security are required

Part of our role as a broker is to put quotes on a like-for-like basis so you can see the real cost of each option, and to explain anything in the terms that is not immediately obvious.