Selling goods or services means you’ll end up providing terms if you intend on growing.
Unless you’re cashed up or have a modern invoice financing alternative like Waddle in place, you’ll need to bridge shortfalls between paying wages and suppliers.
Stepping outside of traditional lending products, such as overdrafts and term loans can be a daunting task. Low invoice factoring rates are just the tip of the iceberg, deflecting hidden terms that inflate costs and erode profits, leading to stifled growth.
Naturally, small businesses turning to vanilla working capital products from banks shopping for the lowest headline rate is a common pitfall. Invoice factoring has a shifting price point, varying significantly between traditional and non-traditional providers.
Scratching the surface of factoring costs
- The fees to setup invoice factoring
- Minimum borrowing amounts you are required to commit to
- Extension fees to increase borrowing limits
- Factoring fees charged on invoice values, not amounts actually advanced
- The cost to leave or break the facility
Yes, it's been discovered that some lender contracts charge you for office stationary and printing to send you notices. Invoice factoring costs can spiral out of control if you don't read the small print.
Cheap to book, expensive to fly
Imagine booking a budget carrier airline, it looks great on the advert until you realise you need to pay for seating, extra baggage, food, drinks and a service fee.
What you need to work out is the difference between the advertised price and the true cost of flying, including the inconvenience of not receiving a seamless experience end-to-end.
Invoice factoring costs to look out for
Daily financing charges can take a few forms. Most lenders charge a daily discount rate (or interest fee) on the amount advanced against invoices. Some lenders will charge on the face value of the invoice which will significantly increase the cost of borrowing.
Think of like lots of little loans against each invoice, each one running for the days it takes to pay, with some lenders charging it daily and some in blocks of 7 or 30 days.
Cost to put the facility in place. This can vary depending the amount of work the lender believes it will cost them to onboard you as a client. This can also include a third part brokerage fee.
This is the fee charged as percentage of your yearly turnover. If the fee is 1%, your yearly fee on a $1M turnover would be $10,000. This is the minimum total cost over 12 months and payable if you leave/break early.
Line fee/initial purchase fee
Lenders, in addition to the establishment fee will charge a fixed fee or a percentage of the initial face value of invoices to be funded.
Insurance/bad debt protection
Financiers that lend money against your unpaid invoices sometimes safeguard themselves against the possibility of the invoice payee becoming insolvent. They hold what’s called a trade credit insurance policy and will pass this through to you.
Early exit charge
Most factors will have a minimum notice period of three months to a year with a charge for early exits. Some lenders in an effort to convince borrowers to stay will enforce three months of financing.
This is usually calculated one of two ways; they can either take the average amount your business is advanced per month and pro rata that for the rest of your minimum contract, or, charge your minimum management fee for the year.
You’ll need to ensure that if you enter a 12-month contract that the three month notice period doesn’t extend the contract period, resulting in an actual 15 month stay.
Minimum usage charge/non-utilisation fee
In addition to the setups and being charged for its upkeep, you can also encounter a charge for not meeting the minimum amount you must fund. You may also encounter additional volume charges if you exceed the minimum fee calculated and your turnover exceeds the original contract amount.
The lender will assess your turnover and if it has increased you may be charged an additional service charge on the difference.
Lenders will want to perform regular audits each financial quarter. This involves a physical site visit and request for all financial accounts to be up to date. Audits can take anywhere from 1-5 days depending on the size of your business.
Same day transfer charge
If you require funds in “real-time”, sent via RTGS the lender will levy additional fees anywhere up $150.00 per transfer.
If your business goes insolvent there will be an additional cost to collect on all the invoices from the debtors ledger.
Amendment to security
Additional legal security to support the facility. Traditional financiers are heavily risk averse and usually demand personal guarantees and as many safeguards they can level on the finance.
Review limit increase
Factors will usually charge 1% to 2% on the amount they’re increasing the facility by.
Traditional lenders insist on a full paper based application. Some lenders have adopted online submissions however, still require a long list of printing and gathering documents. This process can take days and usually involves your accountant.
Once the application is submitted, prior to full credit assessment lenders will issue you with an offer letter. This letter will outline the high level terms and pricing. Once you accept this by signing and emailing back you may be required to pay an upfront application fee.
Upon offer acceptance your application will move to credit for a full assessment. This process can take anywhere from days, weeks and months. You will further speak with a credit manager to run through your entire operation again to verify the information provided.
Once your application is approved you will be issued with formal approval. If you decide to proceed at this point you may be asked to pay legal expenses up front to have contracts drawn up for signing.
Now that you’ve signed your finance contract you will need to learn the factoring company’s software system. You will usually receive a setup pack or have the factoring staff visit your office to assist with training. You will need to load all of your customer data, invoicing and learn how to navigate around reports and understand the lenders financing terms.
Submission of invoices/paperwork
Once you’ve been trained up you now need to enter all of the invoicing for your customers. This can sometimes be done via a batch import from your accounting software and commonly needs to be done line by line, so set aside a good amount of time.
Enter invoicing information must be performed as often as you require funding. As you create invoices in your accounting software you are required to manually update the lenders software and forward copies of proof of delivery and purchase orders via email to the lender. Some lenders allow you to upload supporting information directly.
Establishing your factoring facility requires manual letters to be sent to each customer notifying them of a change in banking details and informing them of your new lender relationship. Usually the lender will send these letters on your behalf.
Manually reconciling payments
Your factoring company will regularly receive customer invoice payments. The lender will then reconcile these payments instead of you into the software. From here you can replicate this information into your own accounting software. This manual process is usually a daily administrational task.
Only once the lender reconciles payments are you aware of when or how much a customer has paid.
Audit review process
Audits take place each quarter and involve requests for additional information. You'll likely work with your accountant to compile the paperwork required. You should allow a few days to take care of this process as delaying can cause the lender to stop funding you until it's provided.
Consider the cost of Waddle
Waddle was born from the invoice factoring industry to create a line of credit that business owners actually want to use. We are the best placed modern lender to understand the pitfalls and frustrations facing borrowers today due to our long history in the factoring industry.
We’ve developed the worlds most advanced invoice financing platform, purpose built to remove roadblocks, complex pricing and hidden nonadministrative costs that have plagued this type of product in the past.
Regardless of its use, businesses that turn to the banks or factoring providers will spend...12-19 hours per week in additional hidden admin costs just to have a facility in place.
Unlike invoice factoring providers, Waddle doesn't profit from hidden fees, confusing lock-in contracts or heavy paperwork requirements. We simply tie into your invoicing software to act as a silent partner, enabling you to tap into funds when needed.
We’re rated number one by our Xero users for a reason. It’s only in our interest to enable your growth, bringing us along for the ride.