Invoice financing - also known as factoring or invoice discounting - is a service in which a provider lends a business the value of its unpaid invoices to give them immediate access to liquid capital.
Many businesses - especially suppliers engaged in international trade - work with delayed payment terms, meaning they will receive the payment of their invoices in 60, 90, or 120 days.
However, these businesses often need to pay their own suppliers within this period or simply need cash flow to fund growth. This is why many turn to invoice funding, giving them immediate access to their accounts receivable without waiting for the agreed delayed payment period.
To find out more about invoice financing, read our in-depth guide or view our introduction to invoice financing below.
What are invoice financing costs?
Invoice financing costs are simply the fees charged by finance providers for their services.
Businesses work with financing providers to increase their working capital by advancing their accounts receivable. In return, they agree to pay a small fee, which is typically charged as a percentage of the value financed by the provider.
What is the cost of invoice financing?
Invoice financing costs are typically charged as a percentage fee of the financing amount. Therefore, the greater the amount financed, the greater the fee.
Financing fees will also vary depending on the length of the finance agreement and the financial history of both the borrowing business and its customers. This is due to the potentially increased risk incurred by the finance provider.
Exporter Ltd is owed £10 000 by Importer Ltd after invoicing it for payment with 90-day terms.
However, Exporter needs cash now, so it submits the invoice to a financing company which agrees to pay 80% of the invoice value (£8 000) to Exporter instantly. Exporter agrees to pay a service fee of 1.5% of the loan amount.
Upon agreement, a financing company pays the £8 000 to Exporter within 48 hours of the relevant signed documents being approved.
When Importer pays the outstanding £10 000 invoice amount, Exporter Ltd repays the borrowed £8 000 to the lender, plus the pre-agreed fee of 1.5% (£120).
Invoice financing calculator
Invoice financing fees vary depending on a variety of factors - including payment terms, the amount financed and the perceived risk to the lender - meaning there is no standard set fee applicable to all agreements.
However, Stenn's invoice financing calculator offers an example fee for a financing agreement based on the invoice sum and payment terms.
Check out Stenn's Invoice Financing Calculator and simply toggle the invoice financing terms to receive an example fee. Please note, the figure shown in the calculator is for illustrative purposes only and does not constitute an actual offer. Read more in our Pricing policy.
Invoice discounting vs invoice factoring
Invoice discounting and invoice financing (factoring) are both financial services in which a business gains access to cash from a lender by leveraging against its unpaid invoices. Both services are designed to improve cash flow by turning unpaid invoices into liquid capital.
However, the two services differ slightly in who assumes responsibility for chasing the outstanding invoice payment.
In an invoice discounting agreement, a business submits an unpaid invoice to a lender and receives a sum of its value - typically 80-90% - immediately. The business remains responsible for chasing payment from its customer and, when it receives full payment, repays the borrowed sum to the lender, plus a small, pre-agreed fee.
However, in an invoice factoring agreement, the lender buys the unpaid invoice for a discounted price - also typically 80-90% of its value. The lender now owns the invoice and is responsible for chasing payment. The customer, therefore, pays the full amount directly to the lender, after which the lender forwards it to the business, minus a small, pre-agreed fee.
While the two services are similar, the nature of the agreements can impact the costs charged by the lender. This is because, in an invoice factoring agreement, the lender incurs a greater risk.
By assuming responsibility for chasing payment, the lender risks late or non-payment if the customer defaults. In an invoice discounting agreement, this risk is avoided as the business is contracted to repay the lender whether its customer defaults or not.
Therefore, invoice factoring agreements typically involve slightly greater fees. However, as with all invoice financing agreements, the exact fee will vary based on a range of factors.
What can impact invoice financing costs?
Various factors impact the exact fee a finance provider will charge for invoice funding services, including:
Length of finance period - fees increase as the finance period increases (e.g., from 30- to 90-days).
Finance amount - lenders will charge a higher fee as the finance amount increases (e.g., from £10,000 to £100,000).
Type of invoice financing agreement - as this dictates the risk to the lender (e.g., recourse or non-recourse agreement).
Number of invoices processed - lenders may offer discounted fees for businesses that process multiple invoices.
Risk to the lender - determined by background checks on the business and customer. The higher the perceived risk of financing, the greater the fee applied.
Relationship with the lender - lenders may offer reduced fees to long-term, trusted customers.
What other invoice financing fees are there?
Financing fees vary between lenders, with some simply charging a standard service fee while others include additional administration fees.
Other fees charged for invoice financing facilities may include:
Discounting charge - an interest fee applied to invoice funding loans. These are often charged at 1.5 - 3% above a base rate and calculated based on the length of the payment period (e.g., borrowing £8 000 at 1.8% above the 2.25% Bank of England base rate for 40 days would be calculated as: ((£8 000 x (1.8% + 2.25%)) / 365) x 40 = £35.51.
Application fees - fees charged to process applications for invoice financing services.
Due diligence fees/Credit check fees - fees charged to cover the time and resources spent conducting background checks on the business.
Collection fees - fees to cover the administrative tasks involved with chasing and collecting payments from the business' customers.
Overdue fees - fees associated with non- or late payment by the business' customers.
Termination fees - fees charged when a business ends a financing agreement early.
Invoice financing costs can seem complicated as they may vary between providers and the exact agreement terms. That's why Stenn has put together its key points to remember:
Invoice financing fees are typically charged as a percentage fee of the amount borrowed.
This percentage fee varies depending on contextual factors including the amount borrowed and the risk to the lender.
Invoice discounting and invoice factoring are similar but distinct services and therefore involve different costs and fees.
Invoice financing services may include additional fees including application, background check, late and termination fees.
Invoice financing with Stenn
Stenn specialises in providing invoice financing services to small and medium-sized businesses engaged in international trade and working with delayed payment terms.
This article is authored by the Stenn research team and is part of our educational series.
Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.
Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.
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Disclaimer: The above article has been prepared on the basis of Stenn's understanding of the subject. It is for information only and doesn't constitute advice or recommendation. Whilst every care has been taken in preparing this article, we cannot guarantee that inaccuracies will not occur. Stenn International Ltd. will not be held responsible for any loss, damage or inconvenience caused as a result of anything published above. All those applying for credit should seek professional advice when doing so.