Invoice Finance: Advance Rates, Fees and Worked Examples

Invoice finance turns unpaid invoices into cash within a day or two of issuing them, rather than waiting 30, 60 or 90 days for customers to pay. For a growing business with a solid customer base, it can be the cheapest and most flexible way to fund working capital. But it's priced differently from a loan, and the headline rate is rarely the full story.

This article breaks down how invoice finance is priced, works through real-world examples, and shows you what to check in the fine print. For the basics of how the facilities work, see our invoice finance page.

The Three Parts of the Price

• Advance rate. The percentage of each eligible invoice the financier pays you upfront, usually 70% to 90%. The rest, less fees, is paid to you when your customer pays. The advance rate isn't a cost, but it decides how much cash you actually get.
• Discount fee. Interest on the money you've drawn, charged daily on the outstanding balance. Often expressed as a margin over a base rate such as BBSY or the financier's own reference rate.
• Service or administration fee. A charge for running the facility, either a percentage of the invoices you put through (your turnover) or a fixed monthly fee.

You only pay the discount fee on what you draw, not on the whole facility limit. That makes invoice finance cheaper than it first appears for businesses whose funding needs swing up and down through the year.

Worked Example: A Whole-Ledger Facility

A wholesaler turns over $6 million a year, with customers on 45-day terms. It has about $750,000 of invoices outstanding at any time, of which $600,000 are eligible for funding. Illustrative facility terms:

• Advance rate: 80%, giving available funding of about $480,000
• Discount fee: 10% a year on funds drawn
• Service fee: $1,500 a month

Figures are illustrative, not a quote. Two points stand out. First, the fixed service fee is a big part of the cost: if the business only drew $200,000 on average, the effective rate would rise to about 19%. Second, the facility grows with the business. As sales rise, so does the funding available, without a new application.

Worked Example: Single-Invoice Finance

Single-invoice or selective finance lets you fund individual invoices when you choose, with no ongoing facility. It's usually priced as a fee per invoice for a set period.

A consultancy issues a $50,000 invoice to a large corporate customer on 45-day terms. The financier advances 80% ($40,000) for an illustrative fee of 2% of the invoice value for the first 30 days, then pro rata after that.

• Fee for 45 days: $1,000 for the first 30 days plus about $500 for the next 15, so $1,500
• Money received upfront: $40,000, for 45 days
• Effective annual rate: about 30%

Single-invoice finance costs more per dollar than a whole-ledger facility, but there are no monthly fees and no commitment. It's a good fit for a one-off cash need, or for a business that only needs funding a few times a year.

Costs in the Fine Print

• Minimum fees. A minimum monthly or annual fee, charged even if you don't use the facility. Check it against your likely usage in your quietest months.
• Establishment and audit fees. An upfront fee, plus periodic audits of your debtor ledger, sometimes charged separately.
• Term and notice periods. Many facilities have a minimum term, often 12 months, and a notice period to exit. Leaving early can trigger a termination fee.
• Refactoring charges. Higher fees, or a requirement to repay the advance, on invoices that go beyond a set age, often 90 or 120 days.
• Additional services. Credit checks on customers, collection services and bad debt protection are sometimes priced separately.

When Invoice Finance Pays for Itself

The cost of invoice finance should be judged against what the cash lets you do. Some examples:

• Supplier discounts. A supplier offers 2% off for payment within 10 days instead of 60. Taking that discount is worth roughly 15% a year. If your invoice finance costs less than that, the facility pays for itself on those purchases.
• Taking on bigger contracts. A large customer on long payment terms can stretch your cash. Invoice finance lets you say yes without running out of working capital.
• Avoiding expensive short-term loans. Invoice finance is usually far cheaper than an unsecured short-term loan. See the true cost of short-term business loans.
• Protecting property. Funding working capital against invoices can avoid putting your home or business property up as security for an overdraft.

How to Compare Offers

• Ask for the total annual cost at your expected average drawn balance, not just the discount rate.
• Check the advance rate and which invoices are eligible, because that decides how much you'll actually get. See is your debtor book fundable?
• Compare minimum fees, minimum terms and exit costs.
• Check whether the facility is disclosed to your customers or confidential, and what that does to the price.

How We Help

We compare invoice finance facilities from banks and specialist financiers on total cost at your actual usage, not just the headline rate. We also look at whether an overdraft, trade finance or a combination would be cheaper for your cash cycle. Learn more about trade and import finance and working capital finance for SMEs.

Book a free, no-obligation consultation and we'll show you what an invoice finance facility would cost your business.