Invoice (1)
30 May

Invoice Financing Costs In The UK: What Do You Need To Know?

When you’re running your own business, it can be challenging to keep track of all your expenses. As well as make sure that you have enough money to pay your staff, your rent, and more. For example, if you sell products online or in person, how do you make sure that customers pay you?

And how much do you need to charge them to break even? That’s where invoice financing comes in! Here’s everything you need to know about invoice financing costs in the UK. Plus how you can use this service to help your business grow and flourish.

What Is Invoice Financing?

Invoice financing is a common business practice among small- and medium-sized businesses. In the invoice finance UK deal, a lender makes a short-term loan that is secured by your outstanding invoices or accounts receivable. 

This can be an effective means of capitalizing on working capital while expanding your business’s credit lines. However, invoice financing UK comes with costs and risks. Before entering into such an agreement, make sure you’re aware of all its associated expenses.

What Are Invoice Financing Costs in the UK?

For small businesses, invoice finance costs can vary.

Generally, invoice financing costs are straightforward. Invoice finance UK companies charge interest and credit management fees. Rates typically range from 1.5% to 3% over the Bank of England base rate and are calculated every day. 

A fee of between 0.25% and 0.5% is charged for credit management. The fee and interest are generally billed on a monthly basis. There might also be other costs associated with the process, such as origination fees.

When calculating interest rates and management fees, invoice financing companies will consider risk. In this calculation, creditworthiness, the length of time it takes for customers to pay. As well as the credit history of your business are all taken into consideration?

Invoice finance UK will usually be cheaper for smaller invoices and more expensive for larger ones. Therefore, there’s often not one rate that applies across all transactions. And it’s worth noting that invoice finance providers aren’t always transparent about their fees; if you want to find out exactly what they are, ask before you sign up.

Factors That Affect The Invoice Financing Costs

The invoice financing costs are going to vary depending on a number of factors. These are going to include things like your credit rating, business type and how long you’ve been trading for. 

If you’re new to business or have had any issues with paying your suppliers in the past, then it’s likely that your rate will be higher than someone who has an excellent credit rating and has been trading for many years. 

Another factor that can affect your overall invoice finance costs is whether you decide to use a factoring company or an invoice finance broker. An invoice finance UK company will usually charge more. As they cover all aspects of invoicing such as administration and collection. However, may be able to offer better rates if you have a good credit history. 

An invoice finance broker will often charge lower fees as they don’t provide funding themselves but instead arrange funding from one of their investors. This means there is less work involved for them and so you should expect lower charges. 

There are also different types of invoice finance UK available which could alter your overall costs. For example, a lot of companies offer ‘short-term’ funding where you get access to money within 24 hours or the next working day at most. 

However, these loans tend to come with higher interest rates. As they aren’t secured against assets and so lenders aren’t taking much risk when lending out money.

What Are The Risks In Invoice Financing?

Just like all forms of borrowing, invoice financing is subject to risk. Unlike your everyday personal loans and credit cards, however, which are secured against tangible assets (your home, for example), unsecured loans like invoice finance are secured by future payments from your clients. 

If you can’t make those payments on time – either because your business has closed down or because it’s gone bust – then you could lose all of that investment cash before it hits your bank account. 

In other words, if an accounting error means you overstate a client’s payment due or if that payment falls victim to an unexpected event – say a dispute with a client or perhaps an administration error within your firm itself - then investors might not get their money back at all. 

To mitigate these risks, it’s important to choose a reputable invoice finance provider. One way to do so is by checking its status with one of many independent bodies including The Finance & Leasing Association or The International Factoring Association. 

Alternatively, ask for references from companies who have used them in the past and check out online reviews too. It’s also worth noting that invoice factoring comes with its own set of risks including those related to currency exchange rates and interest rates should you choose to borrow instead of sell on your invoices upfront. 

Whatever route you take, just remember that there are no guarantees when it comes to investing. Even when dealing with something as concrete as invoices!

Can I Pay Off Invoice Financing Early?

Some UK invoice finance providers allow businesses to pay off their invoices before they are due. Although there will generally be a charge for doing so. An Invoice finance UK provider may charge several different types of fees when providing invoice finance. 

You should be clear about any fees or charges at an early stage so that you can evaluate whether it is still worth proceeding with your application for invoice finance. In particular, if you want to pay off your invoice finance facility early, you should find out how much it would cost you to do so. 

These invoice financing costs must be reasonable as otherwise, they could make invoice finance prohibitively expensive. For example, a fee of 1% of invoice value per month would equate to 12% per annum. 

This type of fee structure could prove extremely costly if you wanted to pay off your invoice finance within just a few months. Therefore, any such fee structure mustn't prevent business owners from paying off their invoice finance early if they choose to do so.

How Do I Choose Between Invoice Financiers?

There are many things to consider when choosing between invoice financiers. The size of your business, your profit margins and how fast you want funds are just some of them. 

It’s important to do your research before deciding on an invoice finance UK provider as there are a lot of factors that can affect both how much money you get and how quickly it arrives. Here’s a brief overview of everything you need to know about invoice financing costs in the UK. 

If you plan to pay back your invoice financing costs within one month then usually an invoice finance rate of around 10% per month should be charged. 

To ensure that all invoice financing charges fit within these regulations businesses will often specify an upper limit for contracts so they don’t have to repay too much at once if their profits turn out to be lower than expected for example.

When Should I Use Invoice Finance?

Invoice finance UK is a powerful tool, but many businesses misunderstand it. It’s important to understand that invoice finance isn’t a good option for every business, so make sure you do your research and consult with your accountant before deciding whether or not it could be right for your company. 

There are several things to consider when evaluating whether invoice finance could work for your company, including finding out how much an invoice finance provider will charge. 

In general, there are two types of fees associated with invoice finance. The first is origination fees, which can vary depending on what type of loan you’re getting and who your lender is. Origination fees usually range from 0-2% of the total amount borrowed (this fee is also sometimes called a set-up fee). 

The second type of fee associated with invoice finance is interest rates; these rates can vary significantly depending on which lender you choose and how long you borrow money. Interest rates generally fall between 12-24%, but they can go as high as 36%. You should always look at both of these numbers together when considering if invoice finance is right for your business.

Are There Alternatives To Invoice Finance UK?

Yes, there are. Banks and other institutions offer factoring loans. Some invoice finance UK providers themselves also offer products and services similar to invoice finance but with different features. 

For example, a company could use bank-sponsored factoring instead of invoice finance to lower their financing cost. Some other alternatives include asset-based lending and peer-to-peer loans (using sites like Finance Hub). 

Conclusion

If you run a medium-sized business and are looking for funding, invoice factoring is a cost-effective way of getting loans. A business can use it to alleviate cash flow problems and other financial difficulties. 

Before you apply, you should compare the invoice finance costs with other forms of finance, such as bank overdrafts or loans before any decisions are made. Make sure that your terms comply with both government legislation and those set by your industry’s trade association.