How Much Does Invoice Factoring Cost?
Invoice Factoring - The Basics
Invoice Factoring is a business finance product designed to
improve the cash flow of a business. Generally Invoice
factoring services are provided by major financial organisations
such as well-known banks but there are a number of independent
finance companies offering this service too. The basic
principle of invoice factoring is that you use your invoices as a business asset
and sell these to a third party or factor. The factoring
company usually advances funds to between 70-85% of the value of
the invoices. The factor will collect the invoice payment
from your customers and then forward you the balance less any
Invoice Factoring - When Would Your
Business Use It?
Invoice factoring is ideal when your
business wants to improve its cash flow. Perhaps to
invest in sales growth, buy machinery or simply pay
suppliers. It is ideal in industries that historically have a
lengthy payment period, such as manufacturing where payments can be
as long as ninety days or more, and where business costs are
Businesses of all sizes utilise invoice factoring to ensure that
they can promptly meet their own financial commitments, such as
wages, rent and production costs, even when their own customers pay
A further benefit to SME businesses without a specialist credit
control or ledger management is that with an invoice factoring
service they will take responsibility for your customer
payments. This means that invoice factoring is a valuable
source of business finance and a debt collection service in one
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What's Invoice Factoring Going To
Clearly different invoice factoring companies
will have different costs and levels of charges. This can
mean that it's difficult to make comparisons between various
providers. However an invoice factoring agreement can
Interest Charges or Discounting
Fees - As with other sources of business finance interest
is charged on the amount of money made available to you.
Invoice factoring is a loan using your invoices as the collateral
for the funds.
Factoring Service Charges
- These are usually based on the turnover of the business and the
number of invoices generated. The fees are used to offset the cost
of administrating your sales ledger and debt collection. The
service fees can be a significant amount of money over the course
of a factoring agreement.
Credit Insurance Premiums
- Credit insurance is used to insure you against your customers
defaulting payment so that you don't have to pay back monies
Arrangement Charges -This
is the fee charged to set-up your invoice factoring facility
although not all factoring companies make these charges.
This list is not a definitive list of charges. Not all
invoice factoring companies use these charges and there can be
other fees charged for as well. Please see our Buying Guide to
Factoring for additional information.
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