Service charge
The service charge is the main administrative fee charged by the lender. For factoring facilities, it covers credit control services as well as administration. For discounting facilities, it covers platform and administration costs only. Service charges are typically expressed as a percentage of turnover and collected monthly. Rates range from 0.25% for large, low-risk discounting facilities to 3% or more for smaller factoring arrangements.
Discount rate
The discount rate is the interest charged on funds advanced against your invoices. It is applied daily on the outstanding balance, calculated as an annual percentage rate above the Bank of England base rate. As base rate changes, your discount charge will change accordingly unless you have a fixed rate agreement. Fixed rate options exist but are less common.
Additional fees
Beyond the two main charges, facilities typically include a range of additional fees that can add materially to the total cost.
- Arrangement fee: typically 0.5% to 1% of the facility limit, payable on draw-down
- Annual renewal or review fee: charged on the facility anniversary
- Audit fee: the lender audits your ledger periodically, typically costing £500 to £2,000 per visit
- Minimum monthly service charge: a floor cost payable even in low-usage months
- Concentration fee: applies if a single debtor exceeds the agreed concentration limit
- Bad debt protection premium: if you opt for non-recourse cover, an additional percentage of the protected invoices
- Termination fee: early exit charges, often three to six months' minimum service charge
How to compare providers on total cost
When comparing invoice finance providers, do not rely solely on the headline service charge percentage. Calculate the total annual cost including discount rate charges, arrangement fee, audit fees and minimum charges. A lower service charge can easily be offset by a higher discount rate or more expensive ancillary fees.
Frequently Asked Questions
What is the typical total cost of invoice finance as a percentage of turnover?
For a mid-sized whole-ledger facility, the total cost (service charge plus discount charges) typically ranges from 1.5% to 4% of annual turnover, depending on facility size, sector and debtor quality.
Can invoice finance fees be negotiated?
Yes. Pricing is negotiable, particularly for larger facilities or strong trading businesses. Using a broker to approach multiple lenders simultaneously can generate competitive tension and improve your pricing.
Is there a minimum contract period?
Most whole-ledger facilities have a minimum contract period of 12 to 24 months, with a notice period on top. Spot and selective facilities typically have no minimum commitment.