Finance February 10, 2020 Last updated March 13th, 2020 188 Reads share

Are You Paying Too Much for Invoice Finance?

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Invoice finance is a handy way of getting an advance on your outstanding invoices.

Many businesses (over 40,000 in the UK alone), use invoice finance as a way of managing and improving cash-flow.

Broadly speaking, invoice finance comes in two forms – factoring and discounting.
The key difference lies in whose name is used to chase payments. In factoring, your customer will be aware that an invoice finance partner is collecting payment. With confidential invoice discounting, the client us less aware of this. For more information on the differences between factoring and discounting, click here.

The costs of invoice factoring can vary depending on a number of criteria – not least of which is the funding partner you choose. Other key factors include:

  • Your business sector
  • Your trading history
  • The credit-worthiness of your customers
  • Where your business is located
  • The factorable turnover of your business and the size of your sales ledger
  • The type of invoice finance required
  • The amount of each invoice you would like advanced.

Let’s look at some of those in more detail:

Business Sector

Some invoice finance providers won’t operate at all in some sectors. For example, construction can be difficult for many funders. Fortunately, a Touch, we have a number of providers who can offer invoice finance to construction firms, though it may be more expensive than some other sectors.

Why is this so? Inherently, some sectors are riskier than others. With construction, for example, there can be long delays (perhaps caused by weather or unforeseen circumstances), meaning factoring providers have to wait a long time to get paid. The complexity of some sectors can also be offputting to finance providers, who want to see a clear sales ledger and payment schedule.

Trading History

If you can demonstrate that you have a steady business income and you are on top of your finances generally, discussions with an invoice finance provider might become a little easier.

Finance providers will want to see more than your accounts lodged at Companies House. They will want to see a full P&L and balance sheet, bank statements and other items of evidence.

Creditworthiness of Your Customers

While your credit history is always important when it comes to financial arrangements, the key thing for invoice finance is how creditworthy your customers are. Typically they are more likely to pay the factoring provider if they are large and creditworthy, for example, government agencies, large blue chips, etc.

While finance providers will want to ensure you are financially capable, for some, it is your customer who is of most importance. Should your customers have a number of CCJs for example, or other bad credit indicators, your invoices to them will become harder to finance. And if the provider does finance them, it may be more costly.

Location

For us to be able to help you at Touch, your business must be located in the UK. While we can help clients from right across the country, some funders are unable to help businesses in Scotland or Northern Ireland. Part of the value we can add as a free finance broker is to prevent you from applying to providers who can’t help you.

Many finance providers will want to physically meet with you to discuss arrangements. This is a reason why some providers won’t operate in certain geographic areas. Or they may charge more to do so, given the expenses incurred in managing meetings.

Factorable Turnover and Sales Ledger

Key to the cost of invoice finance is an understanding of how many invoices you issue and for how much.  If you are looking to finance the occasional single invoice, spot factoring might be the best answer. However, if you are factoring multiple invoices every month, spot factoring will become prohibitively expensive and a full ledger agreement is likely to be better for you.

The overall cost of finance will depend significantly on the amount of finance you put through the facility on an annual basis.

The Type of Finance Required

Invoice discounting is usually the cheapest form of invoice finance, followed by factoring then selective invoice finance (spot finance/factoring).

Discounting is cheaper because you are running the credit control process – for which you have to employ people, of course.

Advance Rate

The amount of each invoice you wish to be advanced will affect the cost of finance overall. By this we mean what percentage of the invoice amount do you want the factoring partner to pay you on receipt of the invoice? (The remaining balance will follow when the customer pays, less any pre-arranged fees). Typically, factoring providers will forward 80% to 90% on receipt, but higher advances are available.

At Touch Financial, we have put together an invoice finance calculator based on hundreds of real, live clients – breaking down the interest (discount fee) and service fee.

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Richard Leader

Richard Leader

Head of Digital at Touch Financial with a keen interest in business finance for small businesses. Highly experienced digital marketing leader.

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