The two main costs of invoice finance
Invoice finance pricing consists of two distinct charges. The first is the service charge, which covers the lender's administration, credit control (if factoring), audit costs, and platform fees. The second is the discount charge, which is the interest applied to the funds you draw against your invoices.
Together, these two charges represent the total cost of the facility. It is important to compare them on a like-for-like basis when evaluating providers, as the balance between service charge and discount rate varies significantly.
- Service charge: typically 0.25% to 3% of your annual turnover
- Discount rate: typically 1.5% to 3.5% above the Bank of England base rate, charged on funds drawn
- Additional fees: audit fees, arrangement fees, termination fees (vary by provider)
How the discount rate is calculated
The discount rate is applied to the amount of money you actually draw from your facility, for the number of days you have it outstanding. For example, if you draw £100,000 at a discount rate of 3.5% above base rate (currently around 8% total), the daily cost is approximately £22 per day. If your customers pay in 45 days, the cost on that draw is approximately £989.
This is fundamentally different from a term loan rate. You only pay for the days you use the funds, so faster customer payment reduces your total discount charges.
Other fees to check
Before signing a facility agreement, review the fee schedule carefully for less obvious charges.
- Arrangement fee: one-off set-up fee, typically 0.5 to 1% of facility limit
- Annual renewal fee: charged on facility anniversaries
- Audit fee: the lender's right to audit your sales ledger, typically £500 to £1,500 per visit
- Minimum service charge: a minimum monthly or quarterly fee regardless of usage
- Excess concentration fee: charges applied if a single debtor exceeds the concentration limit
- Termination fee: early exit charges if you leave before the contract minimum period
Worked Example
A distribution business with £3m annual turnover using a whole-ledger factoring facility.
- Service charge: 1% of turnover = £30,000 per year
- Average outstanding invoice balance: £500,000
- Discount rate: base rate (5%) + 2.5% = 7.5% on drawn funds
- Discount charge: £500,000 x 7.5% = £37,500 per year
- Total estimated cost: approximately £67,500 per year, or 2.25% of turnover
Compared to a £500,000 overdraft at a similar rate, the total cost is broadly comparable, but invoice finance provides a facility that grows with turnover and does not require annual renewal negotiation with a bank.
Frequently Asked Questions
Is invoice finance more expensive than a bank overdraft?
The comparison depends on your usage and turnover. Invoice finance costs are typically 1.5% to 3% of turnover, while a large overdraft may cost a similar amount in fees and interest. The key advantage of invoice finance is that it scales with turnover and does not require security beyond the sales ledger itself.
What is a minimum discount charge?
Some lenders charge a minimum monthly discount fee regardless of how much you draw. This means you pay a floor cost even if you draw nothing in a particular month. Check for this clause in your facility agreement.
Are invoice finance costs tax deductible?
Yes. Finance charges, service fees, and interest paid on invoice finance facilities are generally allowable as business expenses for corporation tax purposes. Consult your accountant for confirmation based on your specific circumstances.