Why discounting costs less than factoring
With invoice discounting, you retain your own credit control function and your customers pay you directly. The lender does not provide collections services, so their operating costs are lower. This saving is typically passed on as a lower service charge. For businesses with established, competent credit control processes, this makes discounting more cost-effective than factoring at equivalent turnover levels.
Typical cost structure
Invoice discounting costs follow the same two-component structure as factoring: a service charge on turnover and a discount rate on drawn funds. The service charge for discounting is typically 0.25% to 1.5% of annual turnover, compared to 0.5% to 3% for factoring. The discount rate is typically comparable across both products.
- Service charge: 0.25% to 1.5% of annual turnover
- Discount rate: Bank of England base rate plus 1.5% to 3.5%
- Arrangement fee: typically 0.5% of facility limit, payable on set-up
- Audit fee: typically £500 to £1,500 per audit visit
Frequently Asked Questions
Is invoice discounting cheaper than a bank overdraft?
It depends on facility size and usage. For businesses with consistent invoice volumes and high drawn balances, invoice discounting can be comparable to or cheaper than an overdraft when the facility size and available headroom are equivalent.
Do I pay the discount rate even when I do not draw funds?
No. The discount rate is applied only to the balance you actually draw. However, many facilities include a minimum monthly service charge regardless of usage.