How much does invoice discounting cost?

Brendan Burgess

Brendan Burgess

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How do the charges work for invoice discounting?

Is it a regulated activity?

What is a typical interest rate?

Do they charge an arrangement fee?

Brendan
 
Its going to be a risk based decision by the provider. I've seen them advertising up to 90% of the value of the invoice but no doubt it varies from company to company and the level of risk they are taking on.

I can't say for all but the couple I've spoken to in the past (never used as we found alternative ways of managing cash flow) didn't charge a fee and they make their money from the margin between what they buy the invoice for and what they recover. Riskier the invoice, the less you are going to get so I presume that they are doing a credit check in the background.

I'll stand corrected but I don't believe it is a regulated activity
 
thedaddyman said:
didn't charge a fee and they make their money from the margin between what they buy the invoice for and what they recover. Riskier the invoice, the less you are going to get so I presume that they are doing a credit check in the background.
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Thanks

I think that is factoring. They buy the invoice and take the risk.

As I understand it, with Invoice discounting, it's a bit like an overdraft but the bank has the security of the debtors' ledger. They lend about 70% maximum.

If a debtor does not pay, the company takes the hit, not the bank.
If the company goes bust, the liquidator would collect the debts and pay them over to the bank.

Invoice financing is a lot less risky than factoring.

Brendan
 
I sent an email to AIB and they got back to me promptly.

They charge a fixed monthly fee of c. €500 per month irrespective of the amount.
They charge an interest rate similar to the overdraft interest rate for business which is around 8% at present.

She was very helpful and said that because of the high fixed charge, it was not really a good solution for borrowing amounts of €200k or less.

Brendan
 
Hello Mr. Burgess,

Firstly, you are correct, with regards to highlighting the difference between Invoice Discounting and Factoring, above. Another key feature of Invoice Discounting is that it is confidential - so 3rd party debtors are not advised that their invoices have been discounted. With factoring, 3rd party debtors are usually informed that their invoices have been sold.

From memory, I don't think it's a regulated service. However, regulated entities (i. e. Banks) typically won't stray too far away from the Central Bank Regs.

My experience is that there are basically two tiers of Invoice Discounting provider:

* Banks - primarily AIB and BoI

* Non Banks - such as Bibby, Close Brothers, Invoice Fair etc. I believe that Capitalflow are currently exiting the Invoice Discounting market.

Pricing would be similar in BoI, to that quoted by AIB. In truth, there's some ability to negotiate, with rates and fees reduced to secure lower risk customers, or those requiring higher credit limits (at "safe" levels).

Pricing at the Non Bank providers will typically be higher, by 2% - 5%, albeit Bibby have moved a little closer to the two Banks, since forming a partnership with PTSB.

Watch out for "hidden" charges, such as transfer fees associated with each drawdown, all providers have them, but they vary significantly, from one Invoice Discounting provider, to the next.

Non Bank providers will typically provide facilities to smaller borrowers, with limits of €75k - €100k. On occasion, they'll also agree to discount a large individual invoice.

Discounting rates are typically 70% - 80% of the face value of the invoice, depending on the perceived risk (this extends past the risk associated with the trade debtor, to also consider how good the Finance team at the customer's office is - when it comes to record keeping, credit control etc.).

Don't be surprised to see a level of personal guarantee from the promoters, in addition to a charge over book debts (sometimes the lender won't take an actually charge, but simply takes an assignment, complete with pledge that the debtor book won't be given as security to another lender).
 
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A very quick rule of thumb:

- Invoice Discounting can be a good source of working capital, for growing businesses, who provide clear and well documented products or services.

- Invoice Discounting is not at all suitable for those with shrinking businesses, a challenging Debtor book with many 3rd party Debtors not paying to terms (90 days is usually the max accepted for discounting purposes), and it is not suitable for businesses that provide products or services involving multiple stage payments, delays in transfer of title to stock etc.

Trade debtors based outside of Republic of Ireland are rarely favoured, but invoices to these parties can be discounted, by prior agreement with the lender (often conditional on additional comfort being provided, by way of insurance over the trade debt).
 
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