Invoice Finance Cost per $100,000 Funded

Key takeaways

• Cost = discount/service fee + interest on drawn funds, over the days outstanding.
• The advance rate matters - you fund the gap on the unadvanced portion.
• Faster-paying debtors make invoice finance dramatically cheaper.
• Always annualise before comparing with any other facility.

How is it priced?

Two components, sometimes bundled into one quoted rate.

• A service or discount fee, usually a percentage of the gross invoice value, charged whether the invoice is paid in five days or fifty.
• Interest on funds drawn, charged for the period the advance is outstanding.

The advance rate then determines how much you actually receive. At an 80% advance rate on a $100,000 invoice you get $80,000 now and the balance, less fees, when your customer pays.

Additional charges that appear in some facilities and not others: an application or facility establishment fee, a minimum monthly fee if you do not use the facility enough, debtor credit check fees, and charges for disbursements.

A worked example

Illustrative only - not a quote, and rates vary widely by provider, industry and debtor quality. Assume a $100,000 invoice, 80% advance rate, a 0.5% service fee on invoice value, and 2% per 30 days on the drawn amount.

Two things to notice. The annualised cost is high - considerably higher than a secured overdraft. And the fixed service fee makes short-dated invoices proportionally more expensive in annualised terms, the same dynamic that makes short-term fixed fees expensive everywhere.

When does it still make sense?

Despite the cost, often - because the alternative is frequently not a cheaper facility but no facility at all.

• You have no property security. Invoice finance is secured by the receivables, so it is available to businesses that cannot access a secured overdraft.
• It scales with revenue. A growing business outgrows a fixed overdraft limit; an invoice facility grows with the invoice book.
• The cost buys growth. If the funding lets you take an order you would otherwise decline, compare the cost against the margin on that order, not against an overdraft you cannot get.
• Early settlement discounts. If suppliers offer a discount for early payment, that saving can offset a meaningful share of the finance cost.

Before signing, check whether the facility is disclosed or confidential - whether your customers are told - whether it is recourse or non-recourse if a debtor fails to pay, whether there is a minimum monthly fee, and what the exit terms and notice period are. Concentration limits matter too: many facilities cap how much of the book any single debtor can represent.

Frequently asked questions

How much does invoice finance cost?

It combines a service or discount fee on the invoice value with interest on the funds drawn, so the total depends on how long the debtor takes to pay. Annualised, it typically sits well above secured overdraft pricing - always convert to an annual figure before comparing.

What is an advance rate?

The percentage of the invoice value paid to you upfront, commonly around 80%. The balance, less fees, is paid when your customer settles the invoice.

Will my customers know I am using invoice finance?

It depends on the facility. Disclosed factoring notifies debtors and the financier may collect directly; confidential invoice discounting does not, and you continue collecting. Confidential facilities generally require stronger financials.

What happens if my customer does not pay?

Under a recourse facility you repay the advance. Under a non-recourse facility the financier bears approved debtor insolvency risk, which costs more. Check which you are signing, because the difference is significant.

Related reading

• Invoice Finance and Debtor Finance: A Practical Guide
• Invoice Finance vs Overdraft: Which Fixes Your Cash Flow?
• Business Overdrafts and Working Capital

Sources

• Moneysmart - business finance — ASIC
• Small business lending inquiry — Australian Small Business and Family Enterprise Ombudsman