Think Invoice Finance is expensive – Read On
There’s a widely held perception that invoice finance is an expensive funding tool. Starting with the premise that any business incurs costs whatever stage in its existence, then its important to be able to measure and compare costs.
I have spoken at length this week to a business about to embark on a new invoice finance facility. The business has turnover in the region of £4m and is an importer & manufacturer of product sold into an established and predominantly creditworthy UK debtor base. The new invoice financier has offered an 80% facility subject to a funding cap of £800,000 with funds used attracting interest at a rate of 2.5% above Bank of England Base Rate (Currently 0.5%).
There’s an administration charge of £8000 a year.
The funding line provides sufficient funds to replace existing facilities (average funds used are around £600,000) and allows for planned expansion.
In days gone by the funding charge may well have been the same at 2.5% above Base Rate, although of course Base Rate has been significantly higher. The administration charge would have been materially higher.
The facility on offer represents a cost effective means of maintaining and growing a business. The facility is supported by relationship ‘banking style’ and the expected electronic support.
In this case I believe the business has as good a facility at as good a rate, as possible to achieve. Alternatives considered including equity investment are not comparable.
Not all invoice finance facilities are as easy to justify cost wise and rates and charges will reflect risks involved but invoice finance should never be written off without full consideration and of course proper comparison.
A good, experienced, independent broker will of course be able to help any business search for the most cost effective and viable funding solution.