Invoice financing – how much does it really cost you?

Finding the right finance for your business is just as important as any other aspects of your business – the wrong product could prove costly, or at worst fatal, to your business. There are many products available on the market and, depending on your specific business needs, not all options would be available to you nor would they be the right “fit” for your business. This short blog discusses some considerations you need to take into account when looking for a cash flow facility for your business.

With a large choice of debtor financing facilities on the market it can be difficult to find the right product for your business. The following list, by no means exhaustive, lists some questions you need to ask of yourself and your business when looking for a facility:

• How often would I need to finance any of my invoices?
• What proportion of my debtor book actually needs financing?
• Do I want flexibility and control over what and when I use the facility?
• Do I want a financing “partner” relationship for my business (someone who works with you to make the facility work best for your business), or am I happy dealing with a computer screen or a call centre? Do I want service?
• Do I want to know that there are absolutely no hidden fees, enabling me to budget and forecast accurately?

Similarly, the list below, also by no means exhaustive, lists some questions you need to ask about the facilities being offered to you:

• Is there a minimum term (lock-in) contract?
• Do I need to hand over my whole ledger (or most of it) to qualify for the facility, or can I pick and choose which invoices I wish to finance?
• Is their a maximum limit on the facility? Does it stop my business growing when I hit that limit?
• Will I be handing over my customer/debtor management (and customer relationships)?
• What are the establishment fees?
• What are the ongoing (facility) fees?
• What are the exit fees?
• Is there a requirement for notification of a minimum period to serve prior to exiting the facility?
• Is there a minimum turnover I need to finance or is there a base fee I will pay if my turnover doesn’t exceed the minimum?

When you calculate all the fees and charges associated with some facilities, you will find that shopping for the lowest headline rate could result in you choosing the most expensive option for your business. For example, let’s assume you bought a facility charging 2% per month (all fees and charges included) and you finance all of your invoices. If you only really need to finance 25% of your invoices then the real cost to you is 8% on the money that you actually needed. Similarly, if you only needed to finance 10% of your invoices then the real cost is 20% on the money that you actually needed. It is evident that you need to determine how many of your invoices you actually need financed, otherwise you could be paying an enormous fee for a facility that doesn’t suite your business.

Sometimes it is easier to work out how much cash a facility is actually going to cost you. Many businesses have cyclic cash flow issues, so let’s look at another example where a business needs financing four times a year. Assuming $100,000 is financed, with a one year minimum term facility at 2% each month the business pays $100,000 x 12 x 2% = $24,000 over a 12 month period. If this business only financed the $100,000 on the four occasions needed, then as long as they pay less than $24,000 / 4 / 100,000 x 100 = 6% for each time they finance then they are better off without the 2% facility. Let me say that again – in this example the 2% one year term facility is no better than a 6% selective finance facility. It is easy to be distracted by percentage rates – you need to know what the actual cash cost of the facilities is to be able to make an informed decision.

Once you have worked out how much cash each facility is going to cost you, you are most of the way to finding the product to suite your business. Before you commit to a particular facility, ask the questions I pose above to make sure that there are no nasty surprises hidden in the contract – failure to do this could cost you more than you bargained for.

At Capitalise Business Finance there are no hidden fees, charges or “surprises” in our facility. When utilised correctly, we believe that our product is the best on the market – call me for an obligation free discussion on what you are looking for and whether we could help your business succeed.