How invoice finance is priced
With invoice finance a lender pays you a share of each invoice straight away, called the advance, and holds the rest as a reserve. When your customer pays, the lender keeps its charges and releases what is left of the reserve to you. Lenders usually charge a service fee for running the facility and a discount charge, which is interest on the money you have drawn.
The discount charge is quoted as a yearly rate, often above the Bank of England base rate, and is applied to the money you have drawn for each day it is outstanding. Service charges are typically a percentage of turnover, from about 0.25% for large, low-risk invoice discounting facilities to 3% or more for smaller factoring arrangements. Arrangement fees, audit fees, minimum monthly charges and termination fees may come on top, so compare quotes on total cost.
Worked example: £50,000 of invoices paid in 60 days
Finance five invoices worth £50,000 at an 85% advance. You receive an advance of £42,500.00 and the lender holds £7,500.00 as a reserve. The discount rate is 7.5% a year on the advance for 60 days, which is £523.97, and the service fee is 1% of the invoice value, which is £500.00. The total cost is £1,023.97.
That is 2.05% of the invoice value and 2.41% of the advance, or £204.79 per invoice. The lender releases £6,476.03 of the reserve when your customer pays, so you end with £48,976.03 from the invoices. Because the advance was only outstanding for 60 days, the cost works out at an effective annual rate of 15.58%. If your customer paid in 30 days the cost would be £761.99, and in 90 days £1,285.96.
Discount rate, fee per period or one-off fee
Choose how the finance is charged to match your quote. A discount charge is a yearly rate on the advance, counted over the days it is outstanding (days divided by 365). Some factors instead charge a fee on the invoice value for each period, for example 2% every 30 days, and any part of a period counts as a whole one. A one-off fee is a single percentage of the invoice value whatever the number of days.
On £120,000 of invoices across 12 invoices, financed at an 85% advance and paid in 75 days, a 2% fee per 30 days is charged for three started periods, which is £7,200.00. With a 0.75% service fee of £900.00 the total is £8,100.00, or 6.75% of the invoice value. That is an effective annual rate of 45.05% on the £102,000 advanced, which shows why a monthly fee costs far more than its headline looks.
Compare with the Spark Finance turnover calculator
Spark Finance's invoice finance calculator works from monthly turnover and estimates the yearly cost, assuming a 5% base rate. Its defaults are £150,000 a month, an 85% advance, 45 debtor days, a 2.5% margin and a 1% service charge, and it shows £14,344 a year for the discount charge. That page estimates the average ledger as turnover times debtor days divided by 30, which is effectively a 360-day year.
This calculator counts actual days over a 365-day year. For one month of £150,000 invoices at the same 7.5% rate and 45 days, the discount charge is £1,178.94, the service fee is £1,500.00 and the total is £2,678.94. Multiplied by twelve, the discount charge is about 1.4% lower than Spark's figure, which is the difference between 360 and 365 days.
Fixed fees, set-up costs and extra charges
Add a fixed fee per invoice for any transfer or handling charge, and one-off fees such as an arrangement fee. On £36,000 across nine invoices at a 90% advance, 6.25% for 90 days, a 1% service fee, £15 per invoice and £750 of set-up costs, the other fees come to £885.00 and the total cost is £1,744.32, an effective annual rate of 23.70%.
With a very high advance rate the reserve may be too small to cover the charges. On £30,000 at a 98% advance, 12% for 120 days and a 2.5% service fee, the reserve is only £600.00, the charges are £1,909.89 and you would have to pay £1,309.89 to the lender. The calculator shows that amount as the charges above the reserve.
What this estimate leaves out
This is a planning estimate for one set of invoices paid on one date. It does not model a whole-ledger facility with a minimum service charge, a fee that moves with the base rate, a concentration limit, bad debt protection, chargebacks or invoices that your customer pays at different times. Lenders may charge VAT on fees or calculate days differently, so the figures in your agreement are the ones that count.
To compare invoice finance with a short-term loan, use the cash flow loan calculator.
To work out an APR from another offer, use the business loan APR calculator.
Use the right country page
This page stays in pounds and uses UK terms: invoice finance, discount charge, service fee and an APR shown as the effective annual rate. The country choices above the inputs open separate local pages. Choosing United States opens the invoice factoring loan calculator, which uses factor fees and shows the APR as the nominal annualised rate. The inputs reset and amounts are not converted.
Inputs for the invoice loan calculator
How the finance is charged
A yearly discount rate on the advance, a fee per period on the invoice, or a one-off fee on the invoice.
Invoice value and number of invoices
The total value you finance and how many invoices make it up, used for the cost per invoice.
Advance rate
The share of the invoice value paid to you straight away. The rest is held as the reserve.
Days until your customer pays
How long the advance is outstanding, from 7 to 365 days.
Discount rate or fee
The rate in your quote, read as the pricing choice says: per year, per period or one-off.
Fee period
The days in each fee period, used only when the fee is charged per period.
Service fee and other fees
A percentage of the invoice value, a fixed fee per invoice and any one-off fees.
CALCULATOR QUESTIONS
UK invoice loan calculator questions
How do you calculate the cost of invoice finance?
Add the discount charge, the service fee and any other fees. The discount charge is the advance times the yearly rate times the days outstanding divided by 365. £42,500 at 7.5% for 60 days is £523.97.
What is the advance rate?
It is the share of the invoice value you receive straight away. At 85% on £50,000 you receive £42,500.00 and £7,500.00 is held as a reserve until your customer pays.
What happens to the reserve?
When your customer pays, the lender takes its charges from the reserve and releases the rest. In the worked example £6,476.03 of the £7,500.00 reserve is released.
Why is the APR so much higher than the rate?
The APR annualises the cost of an advance that is only outstanding for a few weeks. A 2% fee for each 30 days over 75 days works out at an effective annual rate of 45.05%.
Does paying later cost more?
Yes. The discount charge grows each day the advance is outstanding, and a per-period fee adds a whole period. The example costs £761.99 if paid in 30 days and £1,285.96 in 90 days.
What happens if I change country?
The United States option opens the separate invoice factoring loan calculator, in dollars, with factor fees and a nominal APR. Your inputs are reset rather than converted.