Invoice finance costs: what you pay and how to compare quotes

Invoice finance costs usually come from two main charges: a service fee, typically a percentage of the invoices your company raises, and a discount charge, which works like interest on the money you draw. On top of these, many providers add set-up, audit, transfer or exit fees.

There is no single market price. Each provider prices its facilities on your turnover, your customers, the type of facility and how much work it expects to do. That is why understanding each charge, and how it would apply to your own invoices, is the only reliable way to compare. If you are new to the product, read how invoice finance works first.

The service fee pays the provider for running the facility. It is usually a percentage of the value of the invoices your company assigns, although some providers charge a fixed monthly or annual fee instead.

With invoice factoring, the service fee is generally higher because the provider manages your sales ledger, sends statements and collects payment from customers. With invoice discounting, your company keeps its own credit control, so the service fee is generally lower.

Watch for a minimum fee. Many agreements set a minimum service fee per month or per year based on an expected level of turnover. If your invoicing falls below that level, your company pays the minimum anyway, which can make a facility much more expensive in a quiet period.

The discount charge is the cost of the money itself. It is calculated on the funds your company draws, usually daily, for as long as they are outstanding, and charged monthly.

It is often expressed as a margin over a reference rate, such as the Bank of England's Bank Rate, so it can rise or fall when that rate changes. Because the charge runs until the customer pays, slow payers cost more. Drawing only what you need also keeps the charge down, since undrawn availability does not usually attract a discount charge.

Other fees vary widely between providers and can make a real difference to the total. Ask about each of these before you sign:

• Set-up or arrangement fee: a one-off charge when the facility starts.
• Audit or survey fees: charges for the provider's periodic checks of your sales ledger, mainly on invoice discounting.
• Payment transfer fees: charges for sending funds to your account, especially same-day transfers.
• Credit protection or bad debt protection: an optional or compulsory cost on non-recourse facilities, covering you if an approved customer becomes insolvent.
• Refactoring or older invoice charges: fees or reduced funding when invoices go beyond an agreed age.
• Renewal fees: charged when the facility is renewed at the end of its term.
• Termination and collect-out fees: charges for leaving early, or for the provider collecting outstanding invoices after the facility ends.

Some costs are not fees but still reduce the value of the facility, such as concentration limits that cap funding against a single large customer, or invoices the provider will not fund.

Providers price on risk and workload. The factors that usually make the biggest difference are:

• Turnover: larger, steadier invoicing often attracts lower percentage fees, because fixed costs are spread further.
• Customer quality: creditworthy customers with good payment records reduce risk.
• Number of customers: a spread of customers is lower risk than reliance on one or two.
• Payment terms and debtor days: longer terms mean the money is out for longer.
• Disputes and credit notes: sectors with frequent disputes, such as some construction contracts, are seen as higher risk.
• Facility type: factoring costs more than discounting; non-recourse with credit protection costs more than recourse; disclosed facilities may be priced differently from confidential ones.
• Your company's financial strength: accounts, credit file and existing debt.

A whole turnover facility funds all or most of your sales ledger, usually with a minimum term and a minimum fee. Selective invoice finance lets your company choose individual invoices to fund.

Selective facilities often have a higher charge per invoice but fewer long-term commitments, so they can cost less overall for occasional use. A whole turnover facility usually works out more economical when your company needs funding continuously. Compare both on a full year's expected use.

With a recourse facility, your company carries the risk if a customer does not pay: the provider can ask for the advance back. With a non-recourse facility, the provider or an insurer takes on the risk of an approved customer becoming insolvent, and that cover is priced into the fees.

Non-recourse usually costs more, either through a higher service fee or a separate credit protection charge. It may still be worth considering if a single bad debt would seriously harm your company. Check exactly what is covered, because protection often applies only to customer insolvency within agreed limits, not to disputes or slow payment.

That depends on what the released cash allows your company to do. Invoice finance is not usually a low-cost form of borrowing, but it can be good value if it lets you take on profitable work, secure supplier discounts for prompt payment or avoid more expensive short-term borrowing.

A simple test is to compare the expected annual cost with the extra profit or savings the cash will produce. If the facility only covers a permanent shortfall without improving the business, other options may be more suitable. For factoring, also weigh any savings from outsourcing credit control against the higher service fee.

The biggest savings usually come from shortening the time invoices are outstanding and drawing only what you need. Practical steps include:

• Invoice promptly and accurately so customers have no reason to delay.
• Chase overdue invoices consistently, or let the provider do so under a factoring facility.
• Draw funds when you need them rather than taking the full availability every day.
• Keep turnover close to the level the minimum fee assumes, or negotiate a minimum that reflects quieter months.
• Review the facility at renewal, as your turnover, customers and track record may justify better terms.

The fairest comparison is the total annual cost at your realistic turnover, set against the funding you will actually use. These steps help:

1. Estimate your annual invoicing and average debtor days, using a cautious figure.
2. Ask each provider for every fee, including minimum fees, audit, transfer and exit charges.
3. Work out the service fee on your expected turnover, or the minimum fee if higher.
4. Estimate the discount charge on the average amount you expect to draw.
5. Add the other fees and compare the annual totals.
6. Check the advance rate, concentration limits and which invoices will not be funded, since these change how much cash you actually receive.
7. Compare the minimum term, notice period and any personal guarantee or indemnity requested.

Invoice finance for limited companies, LLPs and partnerships of four or more partners is usually unregulated, so Consumer Credit Act protections generally do not apply. Read the agreement closely. Directors are often asked to give a warranty or indemnity covering the validity of invoices, and providers commonly take a debenture over the company. Notice periods can be several months, during which minimum fees still apply. Our guide to factoring vs invoice discounting covers the practical differences in more depth.

Welcome Finance is a commercial finance broker, not a lender. We check your company's eligibility in about 60 seconds without affecting its credit score, then introduce you to suitable invoice finance providers on our panel. Providers run their own credit checks once you decide to apply and make their own decisions.

Your dedicated relationship manager helps you set quotes side by side on total annual cost and stays with you by phone, email and chat until funds are released. We don't charge you a fee. We are paid a commission by the lender when your finance completes, and you can ask how much it will be. Commission can differ between lenders.