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Invoice Factoring Costs in the UK (2024 Guide)

What is Invoice Factoring?

Invoice factoring is a financial agreement in which a business sells its invoices (also called account receivables) to a factoring company at a discount. With invoice factoring, a business gets access to immediate cash flow instead of waiting for months for the invoices to get paid.

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Cost of Invoice Factoring

These two major factors determine the cost of invoice factoring.

1. Factoring fees

Also called a discount rate or factor rate, this fee is the cost of the factoring services provided by the factoring company. The factoring fee is calculated as a percentage of the total costs of all the account receivables. Factoring fees can vary from 3–8% of the overall value of the unpaid bills. 

This factoring fee can be charged weekly, monthly, or annually, depending on the conditions of your agreement. 

2. Upfront cash value

Also called an advance rate, this is the money that the factoring company pays you at the start of your factoring agreement. This cash amount is a fixed percentage of your invoice value. Ranging from 70% to 90%, different factoring companies can give you different upfront costs.

Relationship Between Advance Rate and Factoring Fee

There is no direct relationship between these two. You might be thinking that if a factoring company offers a higher advance rate, will they charge a higher fee too? The answer is yes and no. 

  • A factoring company that offers a high advance rate is taking on more risk. If the client fails to pay the pending bill, the factoring company will be at a disadvantage because they have already paid out a significant portion of that invoice to you. To account for this increased risk, they might charge higher factoring fees. However, this isn’t a rule. 
  • The factoring market is competitive, and fees are influenced by what other factoring companies are offering. Some companies might offer higher advance rates without higher fees to remain appealing to businesses.
  • Factor fees and advance rates are affected by many other factors, which we’ll talk about in detail further.

Invoice Factoring Cost Example

Let’s consider an example of invoice factoring. Make sure you understand advance and factor rates before we talk about what other factors affect the cost of invoice factoring.

Imagine you’ve issued an invoice for £10,000 payable in 30 days but need cash sooner. You opt for invoice factoring, where a factoring company offers a 90% advance rate and a 5% factoring fee. You receive £9,000 upfront (90% of the invoice). When your client pays the full invoice amount (£10,000) to the factoring company, they deduct a 5% fee (£500), and you receive the remaining balance of £500 at the end. 

Factors Affecting the Cost of Invoice Factoring

Factoring companies consider the strength of your invoices before getting into an agreement. There are a lot of factors to consider when evaluating your invoices. 

Reputation of your business sector

Different types of businesses have different client bases and reputations, which can affect both the advance rates and the factoring fees. For example, healthcare or pharmaceutical industries in the UK, which are known for stable and reliable payments, might enjoy higher upfront cash and lower factoring fees. 

On the other hand, businesses related to the construction sector in the UK can get very different rates. In this sector, invoices involve multiple clients with long-term contracts. There can also be disputes over project completion among different parties, and late payments are also more common.

History of your clients and how reliable they are

Factoring companies prefer low stakes. If your business has a good relationship with your clients, there is a high probability that they’ll pay the pending bills on time; hence, your factoring company will see it as less risky. If your business has trustworthy regular clients with a good credit history, then you are most likely to get lower rates for factoring and a large portion of your invoice value upfront.

Fixed minimum sales and amount of invoices

The amount of business you bring to the factoring company matters. If you have a high volume of invoices, you can get better rates. Some factoring companies also require businesses to have a fixed minimum of sales. This is to make sure the business is in a healthy financial state. 

Length of contracts with your clients

The factoring fee increases with the length of the factoring period—that is, the time from when you factor your invoice until your customer pays it in full. If your customer pays the invoice within 30 days, you’ll face a lower factoring fee compared to a scenario where the customer takes 90 days to settle the amount. This reflects the increased risk and financing costs for the factoring company over longer periods.

Addition Invoice Factoring Costs

Keep in mind that these invoices are not always explicitly mentioned in your contract with the factoring company. We advise that you carefully read the conditions of your agreement. It’s always better to ask any questions beforehand to avoid surprises later.

Late invoice fee

A factoring company would want to minimise its financial stake. If a customer fails to pay the pending money for an invoice on time, the factoring company can try to charge you an overdue or penalty fee. 

That’s why it is advised to read your factoring agreement carefully and see if there is anything mentioned related to it. Even if there’s nothing explicitly mentioned, ask your factoring company about their strategy if a client doesn’t pay on time.

Collection services charges

A factoring company uses its resources to collect payments from your clients, which is usually covered by the factoring fee. However, some factoring companies can charge you separately for their management and execution. 

This is beneficial for small businesses because it saves them from having to chase after payments themselves, instead, they can pay a small amount to the factoring company to collect their invoices.

Annual fee

This is not a common fee, but it can be applicable in some cases. If you have worked with a factoring company for more than a year, they might charge you an annual fee or a fee to renew your factoring contract. 

Penalty for early cancellation of the agreement

If you discover a provider offering to purchase your invoices at more favorable rates, or if you decide to go in a different direction, you should have the flexibility to terminate your contract at any point. Some factoring companies try to trap businesses in long-term contracts with a penalty if you cancel the contract before it ends. 

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Written by:

Henry Baker
Henry Baker
Henry Baker, an adept financial & business copywriter in England, boasts a decade-long career collaborating with top-tier UK financial institutions. Renowned for his skill in translating intricate finance into captivating content, he's a trusted authority in simplifying complex concepts for diverse audiences.

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