Invoice Finance Costs Explained

The cost of invoice finance breaks down into two headline charges, and understanding the split is the fastest way to compare quotes honestly. The first is the service charge, billed as a percentage of your gross turnover that runs through the facility (indicatively around 0.5% to 3%, depending on volume, invoice count, and how much administration the lender takes on). The second is the discount charge, which behaves like interest on the money you actually draw against your invoices (indicatively base rate plus roughly 2% to 4%, accrued daily on the drawn balance). We are a broker, so we do not set either number; the lender prices your facility on the specifics of your book, and every figure here is illustrative rather than a quote.

The service charge covers the lender's operational cost of running the facility, and its size is driven by how much work your ledger creates. A business raising a handful of large invoices to blue-chip debtors is cheaper to administer than one raising hundreds of small invoices to a fragmented customer base, so the percentage flexes accordingly. In factoring, where the lender also chases and collects payment (credit control), the service charge sits at the higher end because you are buying a service as well as funding. In confidential invoice discounting (CID), you keep collections in-house and your customers need not know a funder is involved, so the service charge is usually lower.

The discount charge is where the "like interest" comparison matters. You are only charged on funds drawn, for the days they are outstanding, so a business that draws sparingly and gets paid quickly pays far less than the headline rate implies. It is expressed against a reference rate (commonly the Bank of England base rate, sometimes a lender's own base), plus a margin. Because it accrues daily, the real cost tracks your debtor days: shorten the time your customers take to pay and the discount charge falls in step.

Beyond the two core charges, watch for the smaller lines that shape the true cost. Expect a set-up or arrangement fee to open the facility, and sometimes an annual renewal fee. Many facilities carry a minimum service charge, a floor the lender bills even if your turnover dips, which protects them but can sting a seasonal or shrinking business. Other common items include a CHAPS or same-day payment fee, a trust or disbursement account fee, and, on some agreements, an early termination charge if you exit before the notice period. Ask for the full fee schedule up front; a low headline percentage can be undercut by the extras.

A short worked example, purely illustrative, shows how the parts combine. Say a company turns over 1,200,000 pounds a year and puts it all through the facility. At a 1% service charge that is 12,000 pounds annually. Suppose it typically draws 100,000 pounds against outstanding invoices; at a discount charge of, say, 8% a year that is roughly 8,000 pounds if the balance stays drawn all year, though in practice it will be less because you repay as customers settle. Add a one-off set-up fee of a few thousand pounds in year one. The blended cost is therefore driven far more by how you use the facility than by any single quoted rate. Your actual numbers will differ, and only the lender can confirm them.

The advance rate is not a cost, but it shapes the value you get. Lenders typically advance around 80% to 90% of an approved invoice's value on day one, releasing the balance (less charges) when your customer pays. A lower advance rate means less working capital freed up for the same fee, so it belongs in any real cost comparison. Advance rates, like everything else, are set by the lender against your debtor quality and sector.

What we do as a broker is read your ledger, turnover, debtor spread, and sector, then place you with lenders whose pricing and structure actually fit, rather than chasing the lowest advertised service charge that hides its cost elsewhere. No broker can promise a rate, an advance percentage, or approval before a lender has underwritten your book; those decisions and prices sit with the lender. What we can do is get the right funders looking at your case quickly and translate their quotes into a like-for-like comparison so you can see the genuine all-in cost.