Borrowers are charged interest and credit management fees. Invoice financing costs are straightforward. This means factoring usually costs more than invoice financing. Because factoring agents take over the company’s sales ledger and assume responsibility for chasing customers for payment, their administration costs are higher than those for invoice financing. This is a hybrid calculation, and it works out as a percentage of every invoice and a ‘time-charge’ that reflects the length of time that credit is extended. Factoring agents charge something called the ‘factor rate’. Invoice financing companies charge interest on the loan, plus an administration fee. Invoice financing and invoice factoring have different cost structures. The lender recoups the loan of £8,000 and after deducing fees and interest, they send the balance to the wholesaler’s bank account.īalance transferred to wholesaler: £1,700 ![]() They remain unaware of the lender’s role. As this is confidential invoice-financing, the customer assumes they are making payment direct to the wholesaler. This is called the ‘pre-payment percentage’.Ħ0 days later, the customer pays £10,000 into a trust account controlled by the lender. The wholesaler submits a duplicate of the invoice to the lender and they send £8,000 (80%) to the wholesaler’s bank account. They will lend 80% of the value of the invoice as soon as it is raised. However, the wholesaler has an agreement with an invoice financing company. This locks up the value of the invoice for two months and slows down the wholesaler’s cashflow. They usually take 60 days to pay the bill. With invoice factoring, the company’s customers will usually know.Ī wholesaler sends an invoice for £10,000 to a customer. The company’s customers will usually remain unaware that the company is borrowing against their invoices. With invoice factoring, the company sells their sales ledger to a third-party lender (the factor), who collects the unpaid sums. They retain control of their sales ledger and are responsible for collecting unpaid sums. With invoice financing, the company borrows against their unpaid bills. However, the main difference between the two types of finance is who collects on the unpaid invoices. These variances can affect the percentage of the sum of each invoice that is immediately provided, and the fees and interest charged. Within these sub-types, there are further differences, such as ‘selective receivables financing’.
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