Typically, factors will lend up to 80% of an invoice value. The words “up to” are all-important there. Much depends on the terms of sale your company operates and the credit-worthiness of your customers.

If every sale is a firm sale to a very reliable customer, with no ability for the customer to return the goods or demand credit notes, then you are quite likely to get up to 80% of the invoice value. If there is much potential to return some or all of the goods, or there is a history of late payment, the factoring company is likely to reduce the percentage it advances, perhaps to more like 60%. Most factoring companies will lend hundreds of thousands, and even millions, to companies. For larger sums the smaller factoring companies might not be able to do the deal, but the larger ones would surely be interested. Indeed, invoice discounting or factoring frequently form a considerable part of the funds used in management buyouts these days. How much does it cost? There are two elements to the cost: a “service charge” and interest payments. The service charge is calculated as a percentage of turnover.

There is usually a minimum guaranteed level of turnover which companies must agree to, which means that if turnover is less than expected, an additional fee would be paid. This service charge can be quite high, and is one of the reasons why factoring is too expensive for some types of business. The service charge is a one-off payment which is charged regardless of whether a customer pays within 3 days or 120. If your company has a few customers who pay very quickly, therefore, you may decide that it is not worthwhile putting invoices to those customers through the factoring company. Most factors will allow that, so long as your turnover excluding those customers remains within their limits, though few will like doing it. The service charge charged varies from 0.3% to 3% of turnover. This is clearly a wide range, but most companies should expect to be in the 1.25% to 2.5% bracket. Factors will try to work out a rate based on your business. Since they will be processing and collecting your debts, a high volume of invoices will cost them more than a low volume, and the percentage varies to reflect that.

Interest is charged on the amount borrowed at any one time, just as with a bank overdraft. Typically, interest rates charged will be between 2 and 4% over base rate, although occasionally lower rates may be available for substantial companies.