A fast growing alternative form of lending for small and medium sized businesses in the UK is invoice factoring, also known as invoice financing. This lending option allows companies to loan money against outstanding invoices that they are owed for a small percentage.
The cost of invoice factoring differs between lenders but it is important that all SMEs who are looking to lend have a good idea of what factoring entails and how much it will eventually cost them.
Lender’s factoring rates are calculated using the volume of monthly receivables you wish to lend against; the average amount of the invoice; the industry you operate in; how credit worthy your customers are and the average length of time it takes for your customers to pay back their outstanding invoices.
After a lender has taken all of these factors into consideration, they will make you an offer with factoring costs ranging from between 1-5%. A lot of lenders will offer volume discounts if you have more outstanding invoices available.
Factoring fees are important to lenders in assessing your factoring costs so they are definitely something business owners should be made aware of in order to negotiate the best offers. They may also be referred to as discount rate.
Both are essentially the fees that your lender charges you for releasing the payments to you. They work in a similar way to any regular business loan you would receive from your bank. The more you are able to hand over in value, in terms of the quantity and costs of invoices, the lower your factor rate will be.
You should always compare invoice finance rates carefully before committing to a lender to ensure that the offer you get is the right fit for you and your company.
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