Factoring and invoice discounting

The cost of factoring and invoice discounting

Guide

The costs of factoring and invoice discounting can change depending on the company offering the service, and are often negotiable. It is a good idea to consider several suppliers, and compare the:

  • discount charges (interest) offered
  • service or management fees
  • any additional costs - eg for additional services such as credit protection
  • notice period for ending the service - most providers require three months' notice, but some have notice periods of up to a year which could be expensive for your business

Discount charges

Discount charges work in exactly the same way as bank interest.

Typical charges range from 1.5 per cent over base rate to 3 per cent over base rate. The discount charge is calculated on a daily basis and usually applied monthly.

Credit management fees

There will be a fee for credit management and administration. The amount will depend on your turnover, the volume of your invoices and the number of customers you have.

Typical fees range from 0.75 per cent of turnover to 2.5 per cent of turnover.

For invoice discounting, fees are typically lower than for factoring because you will still collect and manage debts yourself. They generally range from 0.2 per cent to 0.5 per cent of turnover. These fees are less because the level of service provided is significantly lower than with factoring.

Credit protection charges

These will be levied in non-recourse factoring arrangements, where the factor is liable for any bad debts. The amount will largely depend on the factor's assessment of the level of risk.

Typical charges range from 0.5 per cent of turnover to 2 per cent of turnover.