What is the cost of debt factoring?
Invoice financing can vary in cost depending on a range of circumstances, including the quality of the borrower, the quality of the debtor, the quality of legal agreements and the industry the transaction is occurring in.
To read more about what invoice financing is, click here.
If for example, you have the government that is the obligated party to pay the invoice to your business, then the counter party risk is far lower, compared to if you had a small business.
Costs can vary from 9% p.a up to 40% per annum depending on a range of circumstances. Please remember, most invoice financing is up to a 30 to 90-day period, so the actual costs are only a portion of this.
One of the major issues at present, is a lot of invoice financiers now have their funding lines sourced from banks! Meaning borrowers must meet a very strict set of criteria to get access to invoice financing!
Part of the reason some invoice financiers are providing such low rates, is because several financiers are asking for the right to put caveats on properties etc, to get additional security. This isn’t purist invoice financing.
Invoice financing in its purist form
At Royce Stone Capital, we’ve made sure that our debt factoring solutions are purist. Where the wholesale private lending funds we work with, only take invoices as security! No property security required!
Additionally unlike banks that provide an invoice financing solution, which is cross collateralisesd with your other facilities (including home loans)!
The wholesale funds we work, make sure they go second to your banks debt position and do not touch your other assets! Enabling you to still use bank funding, whilst getting an invoice factoring solution
Debt factoring in its purist form, is where only the invoice is used as security and no other security is requested for by the lender.
Legal importances of invoice quality.
The terms of the invoices you are issuing are of importance, as you much make sure that the quantity and quality of the invoice can’t be contested! The stronger this position, the lower the cost of your invoice financing!
This is why it is imperative that before you get a debt factoring solution, you make sure that the legal agreements of your services are as strong as possible!
What steps can you take to offset the cost of invoice financing?
Because debt factoring aims to give you money upfront, instead of waiting 30 to 90 days for your funds, several steps can be taken to reduce your financings. Ultimately what this comes down to is how well you do your cashflow management.
If you are properly able to manage cashflows, you can profit from debt factoring beyond its costs!
Strategies to reduce the cost of debt factoring!
Because the invoice financier will be giving you upfront funds, instead of you waiting 30 to 90 days. You can use these funds to negotiate better terms with suppliers!
- Negotiate terms with your subcontractors that instead of paying them on 60 days or 90 day terms, you ask for a discount if you pay them within a week. This might be a 1% or 5% discount!
- Negotiate terms with product suppliers, that if you pay them within a week, that you will be entitled to a discount (1% to 5% ).
- Because you will have more money upfront, you can also use these funds to buy services or products in bulk. Once again, these bulk purchases can be used to buy inputs at a discounted price!
- If you have a proper treasury management system within your business, you can have funds sitting in certain savings accounts earning interest! Once again offsetting the cost of your financing. Alternatively you can put them into an offset account to reduce debt costs!
With all of the above steps and proving you have proper cashflow management, you can now reduce, if not profit from your invoice financing solution. Remember you can only manage what you measure!
To learn more about our invoice financing solutions click here.
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