Debtor Financing Costs Explained

Debtor financing is an umbrella term for two cash flow finance programmes called factoring and invoice discounting. These solutions allow your company to finance slow-paying invoices, which improves cash flow. This article helps you understand the rates and fees associated with these two solutions. This article assumes that you are familiar with how factoring and invoice discounting work. If you are not, visit the resource centre first.

Please note that financing proposals are usually tailored to the individual circumstances of a client. Therefore, the fees that you see in your actual proposal could differ from what is presented here.

Factoring vs. Invoice Discounting

Factoring and invoice discounting both provide financing to companies that have cash flow problems. They help companies that offer net 30-day payment terms to their clients but need to get paid sooner. However, both solutions operate differently.

Most factoring programmes provide credit and collections services alongside the financing platform. Invoice discounting, on the other hand, offers only financing. Generally, factoring is offered to smaller companies that also need help improving their credit and collections. Invoice discounting is offered to larger and more well-established companies that don’t need credit help.

Factoring lines are smaller and more labour-intensive than invoice discounting lines, which makes them slightly more expensive. To learn more about both solutions, read “What is Debtor Financing?

Proposal Structure

Most factoring and invoice discounting proposals have all or some of the fees discussed in this section. Keep in mind that proposals may use different terminology and that actual costs are highly individualised.

1. Due diligence fee

The due diligence fee covers the cost of performing the credit reviews, filings, and work needed to put a financing line in place for your company. This fee is paid if you accept the financing proposal.

The cost of this fee can range from a few hundred to a few thousand dollars, depending on the complexity of the situation and the size of the line. Generally, larger companies or more complex situations have higher due diligence costs.

2. Service fee

The service fee is charged on the total value of every invoice that is financed. In many cases, the service fee is the main financing fee that your company must pay.

The service fee rate can range from 0.30% to 2.5% per invoice. Usually, higher lines have lower rates. The size of the fee is determined by:

  • Size of the line
  • Your industry
  • Credit quality of invoices
  • Special considerations

3. Discount fee

The discount fee is charged on the actual advanced funds. Note that the advanced funds are usually a percentage (e.g., 80%) of the total value of the invoice. Most financing companies determine their discount rate using the Westpac lending indicator rate as a base, plus an additional percentage (i.e., WLIR + X%). The discount fee is calculated daily but charged monthly. Some proposals do not charge a discount fee, though most tend to include it.

4. Annual minimum fee

The annual minimum fee is not an additional fee; rather, it is the fee that the debtor finance company expects to make from working with you. This fee is based on the projections that you provided, which were used to determine the service fee and the discount fee that you are charged.

How do the Service Fee and Discount Fee Work?

There is no standard way of charging for debtor finance services. Some proposals charge only a service fee, while others charge both fees. A proposal that charges both fees is not necessarily more expensive than one that doesn’t.

Larger companies prefer to pay the majority of the financing costs through a discount fee rather than a service fee. The reason for this preference is that discount fees more closely resemble line of credit fees. Smaller companies prefer a service fee structure because it is simpler and more predictable. Ultimately, your company can negotiate how the fees are charged and/or split.

To learn more about how the service and discount fees work, read “Understanding Debtor Financing Rates.”

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