How much does Invoice Financing Cost?

To ensure that businesses are not cash-strapped as they await their receivables, invoice financing is the route they opt for. Through invoice financing, businesses sell unpaid invoices to a third party in exchange for cash.

What is the standard charge for invoice financing?

The standard charge, often termed the discount rate, is relatively reasonable compared to other financing forms. The industry average discount rate ranges between 1.0-1.5% of the total value of the invoices factored on a per-month basis.

Simply put, if you have receivables of Rs.10,00,000, the invoice finance fee for the same will range between Rs.1,000-1,500. It is important to note that the relationship between the business and the invoice financing company also impacts the fee charged. If the business enjoys a long-standing relationship with the invoice financing company, there is a high chance of attaining more favourable terms.

Invoice factoring fees and hidden costs

Application Fee

When charged, the application fee is minimal and very reasonable. However, this fee is highly uncommon in industries and lines of business where invoice financing is routine. The financing company may waive the entire fee if there is a long-standing relationship with the client.

Factoring Fee

The larger the amount and value of invoices, the lesser the factoring fee. Again, the fee in this regard is also relatively low. For businesses that have small invoices, the factoring fee is an expensive component.

Credit Checking Fee

The factoring company will ensure that it takes all the steps necessary to protect itself from potential bad debts or defaulting customers. It could happen when a business approaches an invoice financing company and sells the invoices of a customer they know will default on payment. This would leave the invoice financing company in an unfavourable situation. This is why a background check is done about the business's creditworthiness and clients.

Mailing Fee

This fee will be relatively higher in the case of non-confidential invoice financing. This is because, in such a case, the business's clients are also to be notified of the financing arrangement between the business and the invoice financing company. The cost involved in carrying out these tasks as part of the business is factored into the mailing fee charged to the business. The tasks involve communicating with the clients throughout the arrangement until the payment of the invoices is done by those clients.

Factors affecting invoice finance cost

Borrowing Amount

The larger the amount, the better the negotiating power regarding the terms of the factoring agreement.

Number of invoices

Since fees are charged based on the collection, it would be more advantageous if the business had invoices of larger value and lower in number than having a large number of low-value invoices. 

Industry of work

The line of business plays a significant role in determining the risk associated with the arrangement. For example, the construction business is considered to be a high-risk industry. Therefore, the finance costs associated with arrangements in this industry are on the higher end of the spectrum.

Reliability of the clients of the business

If the creditworthiness and financial position of the clients is good, the invoice financing company is likely to offer the business better terms in the arrangement.

Overall business performance

The performance of the business is always an important factor in determining the fees to be charged. The details regarding turnover, credit history, and business size all go a long way in establishing trust.

FAQs on Invoice financing cost

How do you calculate factoring commission?

If the factoring commission is 1.0%, and the invoice amount is Rs.10,000 for the month, then it would be calculated by multiplying the commission rate with the invoice amount, Rs.10,000 x 1.0% = Rs.100.

Which factoring fees are higher?

Factoring fees will be higher in the case of non-recourse factoring. This is because non-recourse factoring would mean that the invoice financing company takes on the entire risk in case of default from the customers. Therefore, since the risk is higher, the fee will also be high.