Invoice discounting - the hidden costs

Invoice discounting companies explain the costs of their discounting facility by telling you that there are two costs involved, firstly the invoice discounting fee which would normally be expressed as a percentage of turnover but sometimes as a fixed monthly fee and secondly the cost of the funds which would be expressed as a percentage over Base Rate.

Very few discounters will mention the raft of other costs associated with their facilities which is unfortunate as these “extra” costs can make a significant difference to the real cost of invoice discounting as opposed to the hypothetical cost.

It would be natural to assume that if one company quoted a service fee of 0.75% of turnover whilst a second company quoted 0.5% that the second company would be significantly cheaper but the truth is hidden in the small print and often the company with the higher service fee will actually end up cheaper in practice.

As the discounter won't have the security of day to day control over the invoices that the factoring company enjoys they will want to conduct regular audits. What many will forget to tell you is that they will debit your account with the costs of this audit and quarterly audits at £750 will add considerably to the total costs of the facility. The most convenient and traditional way for the discounter to pay the client is by same day telegraphic transfer of funds but the cost of this service can vary enormously from one discounter to another and ranges from £20 to £80 a time. If the client were to have regular weekly payments telegraphed into their bank account every week selecting the wrong funding partner could cost an extra £3,120 per annum in transfer fees alone.

One player sets a low facility limit but will offer to review this limit at a cost of £2,000 whilst others set low credit limits on customers with fees chargeable for reviewing these limits.

At least two other factoring and invoice discounting companies that we know of will set a fairly low concentration limit on the largest customer and charge every time that is exceeded.

Please see next page for details on how discounters  restrict funding through unapproved debts