Invoice finance pricing is not quoted as a single number. There are typically two or three cost components, applied in different ways, and the total cost depends on how much you draw, how quickly customers pay, and the type of facility you’re using.
Understanding how each fee works is a prerequisite for meaningful comparison between providers.
The Three Main Fee Components
1. Discount Rate (or Discount Fee)
The discount rate is the interest charged on the outstanding advance. It is applied to the balance drawn from the facility â the amount the lender has advanced that has not yet been repaid by customer payment.
How it’s expressed: As an annual percentage (e.g. base rate + 2%), or as a monthly percentage (e.g. 1.2% per month). Some providers express it as a daily rate.
How it accrues: The discount fee accumulates daily on the outstanding advance. If you advance £100,000 and the customer pays after 45 days, you pay the discount rate on £100,000 for 45 days.
Typical range: Base rate + 1.5â3% per annum for established facilities [VERIFY current market rates â HUMAN CONFIRMATION NEEDED]. Selective and spot facilities charge higher rates per transaction.
The discount rate is the primary borrowing cost â analogous to interest on a loan.
2. Service Charge (or Management Fee)
The service charge covers the administration of the facility. For factoring, it also covers the credit control service. For discounting, it covers ledger management and audit costs.
How it’s expressed: As a percentage of annual turnover â typically applied to total invoice turnover assigned to the facility.
How it’s charged: Usually invoiced monthly, based on the previous month’s invoice turnover.
Typical range: 0.5â2.5% of turnover for factoring (credit control included). 0.2â1% for invoice discounting (no credit control). [VERIFY â HUMAN CONFIRMATION NEEDED]
The service charge is the fixed-cost element. It applies to invoice volume, not the drawn balance â so it accrues whether or not you are drawing heavily on the advance.
3. Additional / One-Off Fees
These vary by provider and facility type:
| Fee | Description |
|---|---|
| Arrangement fee | Charged at setup â typically 1â2% of the facility limit or a flat fee |
| Renewal fee | Annual review and renewal charge â where applicable |
| Audit fee | For invoice discounting â periodic verification of the debtor book |
| Minimum fee | A minimum monthly charge if invoice volume falls below a threshold |
| CHAPS / same-day payment fee | Charge for same-day advance transfers |
| Refactoring fee | Charged when an invoice remains unpaid beyond agreed terms and is extended |
| Bad debt protection premium | For non-recourse facilities â an additional charge to cover bad debt risk |
Total Cost: A Worked Example
Business profile:
– Annual turnover: £2 million
– Average debtor days: 45
– Product: Invoice factoring
– Facility: £200,000 limit
Indicative annual cost:
| Component | Rate | Annual cost |
|---|---|---|
| Discount rate | Base + 2% on average drawn balance of £100,000 | ~£7,250 [VERIFY â HUMAN CONFIRMATION NEEDED] |
| Service charge | 1% of £2m turnover | £20,000 |
| Arrangement fee (amortised over 3 years) | £3,000 ÷ 3 | £1,000 |
| Estimated total annual cost | ~£28,250 |
As a percentage of turnover: approximately 1.4%.
[NOTE: This is an illustrative model only. Actual rates vary significantly by provider and business profile. All figures require human verification before publication.]
What Affects Your Rate
Providers price risk. Factors that influence the discount rate and service charge offered:
- Turnover: larger facilities attract more competitive rates
- Debtor quality: creditworthy customers with good payment history = lower discount rate
- Debtor concentration: high concentration in one customer increases lender risk = higher rate or restricted facility
- Sector: some sectors (construction, recruitment) attract specialist pricing
- Advance rate: higher advance percentages carry more risk = higher discount rate
- Recourse vs non-recourse: non-recourse facilities include a bad debt protection premium
Comparing Providers: What to Ask
When comparing invoice finance quotes:
- What is the discount rate â base rate, fixed, or variable â and on what balance is it applied?
- What is the service charge â as a percentage of what turnover measure?
- Is there a minimum monthly service charge?
- What is the arrangement fee and renewal fee?
- Are audit fees charged separately?
- What advance rate is being offered?
- What happens to the service charge if volume drops â is there a floor?
Getting these answers in writing for three or more providers makes comparison possible. The headline discount rate can be misleading if the service charge model differs significantly between providers.
Selective vs Whole-Ledger: Fee Structure Comparison
| Selective Invoice Finance | Whole-Ledger Facility | |
|---|---|---|
| Fee structure | Per invoice (flat %) | Discount rate + service charge on turnover |
| Minimum charges | None or minimal | Usually applies |
| Best for | Low volume or occasional use | Regular, high-volume financing |
| Cost at scale | Expensive | Competitive |
Related Pages
- Invoice Factoring
- Invoice Discounting
- Selective Invoice Finance
- Selective Invoice Finance vs Full Facility
- Invoice Factoring vs Invoice Discounting
- Recourse vs Non-Recourse Invoice Finance