What factors impact the cost of invoice finance?

Getting paid on time by your customers and clients is one of the biggest ongoing challenges for most businesses. Approximately 25 per cent of business owners have delayed paying themselves because of issues with invoices being paid on time, according to Smart Company.

 

One of the easiest ways to free up your business cashflow is with the help of invoice financing. Invoice finance can help bridge the gap between raising an invoice and getting paid, which can often take months – if not longer.

 

When it comes to the costs associated with invoice financing, all cases will be different and it’s important to understand the factors that a lender will look at.

 

Your customer’s creditworthiness

 

Because the funds being paid to you are coming from a customer, a lender will want to know the state of creditworthiness that customer might be in. The lender will want to know the credit rating of the company as well as their track record of paying invoices.

 

Your business

 

A lender will also have a close look at your businesses credit history and your trading history. They want to know the financial health of your business and how the state of your industry might be impacting both your customers and suppliers.

 

Selective or whole ledger

 

Depending on your lender, you might have the option of choosing whether to submit your entire accounts receivable ledger for financing or choosing selected invoices to borrow against. While selectively choosing invoices might be easier and offer more flexibility, a lender might look at it as a riskier proposition.

 

Recourse or non-recourse invoice factoring

 

Under recourse factoring, the risk of your customer’s debt remains as a part of your business. In the event your customer cannot pay the invoice, you will be liable for the non-payment.

 

With non-recourse factoring, the risk of non-payment is transferred from your business to the invoice factoring company. Once the invoice has been financed, you are no longer responsible for the debt.

 

Given the higher risk of non-recourse finance, there are typically higher costs associated with this type of finance.