Debtor & Invoice Finance

The costs of a debtor finance facility are highly individualised, based on the quality of your business, the quality and number of your debtors, and the type of finance you are seeking, but in general, are comparable to an unsecured bank overdraft.

A key difference between an overdraft and a debtor finance facility is the debtor finance facility generally grows as the business grows and debtors become larger. If you have many customers with good credit, who pay their bills on time, the financier’s risk and their costs will be lower.

If your business is struggling and needs cash to get back on top, lenders will reflect that risk in their rate. If you seek invoice discounting (a confidential loan) rather than factoring, lenders will potentially charge more for the perceived risk of debt collection. And lastly, if you are seeking finance on the whole of turnover (all your receivables), costs may be lower than selective invoice finance.

While the terminology may vary between lenders, invoice discounting and factoring fee proposals typically include a due diligence fee, a service fee, a discount fee, and an annual minimum fee. More fees do not necessarily mean a higher total cost. It is critical to consider the total of each of the fees together on the debt facility.

• Due Diligence: This fee is only paid if you accept the financier’s proposal and covers the cost of credit reviews, filings, and credit line preparation. Clearly, more complex businesses with larger credit lines will require greater due diligence costs.
• Service fee: The service fee is a percentage of each invoice that is financed. The rate is determined by factors such as the size of your line, your industry, credit quality of debtors, and individual considerations. Rates generally range from 0.30% to 3% per invoice.
• Discount fee: The discount fee is essentially the interest rate on the funds advanced on your debtors, not the whole value of your receivables. The rate is commonly determined using a major bank indicator rate as the base plus an additional percentage determined by the financier. The discount fee (interest rate) is calculated daily but charged monthly, however not all lenders charge this fee.
• Annual minimum fee: An annual minimum fee is simply the amount your financier projects they will make from your debt facility. You often won’t be charged this fee unless the service and discount fees are lower than this projection.