How Much Does Invoice Factoring Cost in the UK? A Breakdown for Small Businesses

In today’s article, you’ll learn all about invoice factoring cost and how to get the best deal for your business. 

Running a small business in the UK is exhilarating, isn’t it? 

The thrill of landing new clients, watching your team grow, and seeing your ideas come to life is what we live for, and it’s one of the most satisfying ways to spend your time.

But we can be honest; it’s not all sunshine and roses.

In particular, cash flow problems feel like a dark cloud constantly hanging over our heads. You deliver an amazing product or service, send out your invoice, and then… you wait. And wait. 

Meanwhile, bills are piling up, payroll is looming, and that exciting growth opportunity you’ve been eyeing starts to feel like a distant dream. 

Sound familiar?

The good news is you’re not alone. Late payments are a massive problem in the UK (every 3 in 5 small-medium businesses are awaiting late payments), a problem closing the doors of over 50,000 firms a year and costing them over £2.5 billion across the same time.

But there’s a solution that could be your lifeline: invoice factoring.

Think of it as a fast track to the cash you’ve already earned. No more waiting around for clients to pay – you get the funds you need when you need them. In this guide, I’ll break down exactly how much invoice factoring cost in the UK so you can make an informed decision about whether it’s the right move for your business.

Let’s get into it.

Invoice factoring sells your unpaid invoices to a third party (called a factoring company). They give you a percentage of the invoice value upfront (typically 80-95%), and then they collect the full amount from your customer.

It’s essentially a way to get paid early without spending time chasing down those late-paying clients. You sell the invoice and get paid straight away, and then the pending payment is out of your hands. 

No need to chase it down, get in touch with the customer, or anything like that. You get the money straight into your account, and you’re ready to move on.

Sounds pretty good, right? But, of course, nothing in life is free.

The truth is, you’ll never get 100% of what your invoice is worth. There are typically several fees involved that add up to roughly 1-10% of the invoice value. This can vary depending on the factoring company you choose to work with.

Let’s break the different charges down:

• Factoring Fee: This is the main part of all invoice factoring cost, usually calculated as a percentage of the invoice value. It typically ranges from 1% to 5% but can be higher depending on various factors.
• Minimum Service Fee: This is a fixed or variable fee to cover the administrative and processing costs involved in the factoring process.
• Discount Fee: If you need the money right away and can’t wait until the invoice due date, you can opt for early payment, but it will come with a discount fee.
• Other Potential Fees: Some factoring companies may have additional fees, such as credit check fees, termination fees, or late payment fees from your customers.

Let’s look at an example:

Say you have a £10,000 invoice with a 30-day payment term. 

With an advance rate of 90%, you’ll receive £9,000 upfront – within 24 hours of the invoice being issued. 

The factoring fee is 1.5%, so you will be charged £150.

And you’ll pay a discount fee of 8.25% for each day until the invoice is paid – if it takes the full 30 days, that’s another £61.

So, the total cost is £211, or 2.11% of the invoice.

Now, I know what you’re thinking: “That sounds like a lot of fees!” And you’re right; it’s important to be aware of all the invoice factoring cost involved. 

But remember, the alternative is waiting weeks or even months to get paid, which can severely impact your cash flow and your ability to grow. When you get the money you’re owed now (and save all the time and effort you would have spent chasing it up), this may be the solution you’ve been looking for.

Invoice factoring isn’t a one-size-fits-all solution, and the invoice factoring cost can vary depending on key factors. Understanding these factors will help you get a better idea of what to expect and how to negotiate the best possible deal for your business.

Again, I’m not saying this is a magic bullet for every business. For example, if you’re chugging along as a business, doing fine, and the payments are coming in every now and then, then you may just want to keep going how you are.

However, say you get a new client who wants to order a load of new products and you need the investment for production, a process like invoice factoring could be your saving grace.

Let’s break down the factors.

1. 1. Industry: Some industries are inherently riskier than others. For example, construction or manufacturing companies might face higher factoring fees than those in professional services due to longer payment terms and potential project delays.
   2. Invoice Value and Volume: The larger the value of your invoices and the more you factor, the more bargaining power you have. Factoring companies are often willing to offer lower fees to businesses with high invoice volumes.
   3. Customer Creditworthiness: If your customers have a good track record of paying on time, that reduces the risk for the factoring company, and they may offer you lower fees. On the other hand, if your customers have a history of late payments, it might increase your invoice factoring costs.
   4. Factoring Company: Just like any other service provider, factoring companies have different fee structures. It’s always a good idea to shop around and compare offers from several companies before deciding.

It’s important to note that these are just some factors that can influence the cost of invoice factoring. Other factors, such as the length of your contract with the factoring company or the specific terms of the agreement, can also play a role.

Remember, knowledge is power. The more you understand the factors that affect invoice factoring cost, the better equipped you’ll be to make informed decisions for your business.

So, how do you navigate the world of invoice factoring and find the best deal for your business? Here are a few tips:

• Shop Around: Don’t just settle for the first factoring company you come across. Get quotes from multiple providers to compare their fees, terms, and services. Our team at Adept are experts in staying in the loop, so let us do the hard work for you if you’re looking for the best options available now.
• Read the Fine Print: Before signing any contracts, carefully review the terms and conditions. Pay close attention to any hidden fees or penalties that could catch you off guard.
• Negotiate: Don’t be afraid to negotiate with the factoring company. You might be able to secure lower fees or better terms if you have a strong track record or high invoice volumes.
• Consider Using a Broker: If the thought of comparing multiple offers and negotiating terms sounds overwhelming, consider using an invoice finance broker. They have expertise in the industry and can help you find the best deal for your specific needs.

The Value of Invoice Finance Brokers

Invoice finance brokers are like matchmakers for businesses and factoring companies. They work with a network of providers and can quickly identify the best fit for your business. Here’s why using a broker can be a smart move:

• Save Time: Brokers do all the legwork for you, saving you valuable time that you can spend focusing on running your business.
• Expertise: Brokers have in-depth knowledge of the invoice factoring market and can leverage their expertise to negotiate the best possible terms for you. That also means the best invoice factoring cost for you!
• No Extra Cost: Brokers are typically paid by the factoring company, so their services won’t cost you a penny.

By taking advantage of these tips and considering the use of a broker, you can ensure that you’re getting the most out of invoice factoring for your business. 

Remember, it’s not just about the cost; it’s about finding the right partner who understands your needs and can help you achieve your goals.

There you have it – a comprehensive breakdown of how much invoice factoring cost in the UK. We’ve covered the typical fees, the factors influencing those costs, and how to find the best deal and invoice factoring cost for your business.

Remember, invoice factoring isn’t just about the cost; it’s about unlocking the cash flow that’s rightfully yours. It’s about saying goodbye to late payments and hello to financial freedom. It’s about fuelling your growth and achieving your dreams.

If you’re ready to take control of your cash flow and accelerate your business growth, don’t let another unpaid invoice hold you back. 

Contact one of our experts today. We specialise in finding the right business finance solutions for growing businesses, and we’ll work tirelessly to get you the best possible terms.

Don’t wait for tomorrow – your financial freedom starts now.

Get a free quote and unleash your business’s full potential!