There’s no doubt that invoice discounting and factoring, falling under the category of invoice financing, can be of great assistance to your business. Not only does it allow you and your business to collect money up front and significantly improve your cashflow, it can also relieve you of headaches and stress when trying to collect money from your clients and customers.
Thanks to invoice financing, money is immediately available to re-invest or spend on improvements or projects that will speed up the growth of your business. However, finding the correct invoice financing service is not always as easy as it seems, and there are certain costs and fees you need to be aware of before retaining the invoice financing service. Here is a short list of costs you should consider when choosing invoice discounting or factoring.
Think of a discount charge as an interest rate you get – similar to the ones from the banks. Only, it works in reverse. In other words, say you have an interest rate of 2% a month. An invoice of which the payment is due next month will be subject to one month of interest; meaning they will deduct 2% and the invoice is worth only 98% of its value. An invoice that is due in three months with the same discount charge will be worth only 94% of its value. Discount rates are usually due daily but calculated monthly and can range from 1.5 to 3%.
Even with discount rates, the service could still charge you a fee for managing your accounts. Although some agencies or services could charge a flat rate, usually this rate will also be in the form of a percentage, depending on the volume of work and business you give them. Typical fees range from .75 to 2.5%, a fee which will be recorded as credit management and administration fees.
Depending on the contract, you may have to pay other fees – for example, a credit protection fee. This means that the invoice financing service, and not you, will suffer in case they cannot collect. This is usually optional, depending on your agreement. Read your contract carefully and check for other, perhaps hidden, fees.
As with any business transaction, finding the right partner is very important – and this also includes finding the right invoice financing service such as financing specialists ultimatefinance.co.uk. It’s imperative that you find a partner who can give you the right service for the right fee and cost. Never be afraid of approaching several institutions and comparing their working methods and charges; the invoice financing industry is very competitive and chances are you can make some excellent deals.