I work for a peer-to-peer factoring marketplace startup (http://marketinvoice.com) so I can shed some more light on it. Typically we charge between 1%-3% for a 30 day advance.
A couple of common scenarios in the tech industry:
1) You're a web/mobile agency who gets paid on 30 day terms but you need to pay your staff (and contractors) on a monthly basis. If the times line up exactly you might get away with it but if your customer pays late you end up not being able to make payroll. Being able to get the money instantly as soon as you've issued the invoice is a huge peace of mind.
2) You're a software company which sells licences/subscriptions on a monthly basis. If you get that money up-front it means you can redeploy that money straight into marketing which when you're on an exponential growth curve makes a huge difference and is a vastly cheaper form of financing than venture capital (in this scenario we can actually advance up-to twelve months of subscription fees upfront).
3) You have to pay tax based on the amount of money you've invoiced for, not the amount you received to date, so you can easily get a tax bill for which you won't have the money for until your customer pays you. But the taxman won't generally be willing to wait so you have to finance it somehow.
To get an idea of how big a market this is, last year in the UK alone (where we're based) invoice finance was a ~100 billion pound market. A meaningful percentage of global GDP is dependant on this kind of advance.
In terms of cost most companies just build it into their pricing, it's often easier for these businesses to charge their customers more money than it is to convince their customers to pay faster (these are typically large corporates who can spend more but can't stop internal bureaucracy).
3) You have to pay tax based on the amount of money you've invoiced for, not the amount you received to date, so you can easily get a tax bill for which you won't have the money for until your customer pays you. But the taxman won't generally be willing to wait so you have to finance it somehow.
I was just re-reading this, and this doesn't sound quite right. Is this a cash-basis accounting vs. an accrual accounting thing?
You can do cash-based accounting and pay only when you receive the payment but this is only available to small companies (<1.35m revenue) and with some other restrictions:
Comments
I work for a peer-to-peer factoring marketplace startup (http://marketinvoice.com) so I can shed some more light on it. Typically we charge between 1%-3% for a 30 day advance.
A couple of common scenarios in the tech industry:
1) You're a web/mobile agency who gets paid on 30 day terms but you need to pay your staff (and contractors) on a monthly basis. If the times line up exactly you might get away with it but if your customer pays late you end up not being able to make payroll. Being able to get the money instantly as soon as you've issued the invoice is a huge peace of mind.
2) You're a software company which sells licences/subscriptions on a monthly basis. If you get that money up-front it means you can redeploy that money straight into marketing which when you're on an exponential growth curve makes a huge difference and is a vastly cheaper form of financing than venture capital (in this scenario we can actually advance up-to twelve months of subscription fees upfront).
3) You have to pay tax based on the amount of money you've invoiced for, not the amount you received to date, so you can easily get a tax bill for which you won't have the money for until your customer pays you. But the taxman won't generally be willing to wait so you have to finance it somehow.
To get an idea of how big a market this is, last year in the UK alone (where we're based) invoice finance was a ~100 billion pound market. A meaningful percentage of global GDP is dependant on this kind of advance.
In terms of cost most companies just build it into their pricing, it's often easier for these businesses to charge their customers more money than it is to convince their customers to pay faster (these are typically large corporates who can spend more but can't stop internal bureaucracy).
I was just re-reading this, and this doesn't sound quite right. Is this a cash-basis accounting vs. an accrual accounting thing?
It'll vary by country but in the UK sales tax (VAT) is generally paid based on the invoice date:
https://www.gov.uk/vat-record-keeping/time-of-supply-or-tax-...
You can do cash-based accounting and pay only when you receive the payment but this is only available to small companies (<1.35m revenue) and with some other restrictions:
https://www.gov.uk/vat-cash-accounting-scheme/eligibility
Thanks! I love this kind of market-specific knowledge.