Invoice factoring is a form of invoice finance that helps small businesses cover cash flow gaps while they wait for customers to pay. Because B2B payment terms can stretch for up to 30, 60, or even 90 days, many SMEs rely on invoice factoring providers to pay suppliers, cover payroll, and meet their overhead expenses while they wait for large invoices to clear.
How Does Invoice Factoring Work?
Ever struggled with cash flow gaps while waiting weeks or even months for customers to pay? Invoice factoring addresses this exact issue, helping businesses continue to operate and grow despite lengthy customer payment terms.
Under an invoice factoring agreement, your finance provider advances you 80-90% of an invoice's value and takes on the responsibility of collecting the payment from your customer. At the end of the transaction, the factoring provider pays you the remainder of the invoice, minus their fees.
Invoice factoring applications are reviewed according to your customer's creditworthiness and payment history, so even small companies or those without strong credit can apply.
How Much Does Invoice Factoring Cost?
Invoice factoring involves a few different costs, and prices can fluctuate depending on your customer's risk profile. How much you pay for a factoring facility is more about your customers than your own business history.
For example, if your business invoices massive blue-chip corporations who always pay on day 30, your fees will be lower than if your customers are small, struggling retailers who frequently pay late. Factoring is also cheaper the more invoices you raise.
Breaking Down the Fees
Discount fee
This is the main cost associated with invoice factoring. In the UK, discount fees are usually between 1% and 5% of the invoice's total value, calculated daily or weekly based on how long the invoice remains unpaid.
Service fee
This is the fee your lender charges for the management of your facility. It includes administration fees and service costs associated with chasing your customers for payment, usually a flat percentage of your total gross turnover, ranging from 0.5% to 3%.
APR
Because of the Annual Percentage Rate (APR) of the loan, invoice factoring often works out more expensive than you might realise. A company may say that they charge 2% for 30 days — meaning you're paying 2% every month until the debt is paid. So if it takes your client 90 days to pay, your fee would be 6% of the advanced amount.
Example Cost Analysis
| Calculation | 30 days | 60 days | 90 days |
|---|---|---|---|
| Invoice value | £50,000 | £50,000 | £50,000 |
| Advance rate (85%) | £42,500 | £42,500 | £42,500 |
| Service fee (1%) | £500 | £500 | £500 |
| Discount fee (2% per 30 days) | £850 | £1,700 | £2,550 |
| Total factoring cost | £1,350 | £2,200 | £3,050 |
| Total received | £48,650 | £47,800 | £46,950 |
Hidden Fees to Watch Out For
When deciding on a lender, it's important to read the fine print so you can catch any additional setup fees, annual renewal charges, exit fees, or credit check fees. Always check that lenders are on the FCA Financial Services Register.
Beware of minimum monthly service fees, as you will still owe this amount even in a quiet month. These hidden minimums can drastically inflate your effective annual rate if your sales are seasonal.
Is the Cost of Invoice Factoring Worth It?
Although invoice factoring fees can quickly add up, many small businesses believe that the speed and convenience are worth the cost. A traditional business loan might work out cheaper, but many smaller businesses with limited credit history will be rejected, and the process can take months.
The best thing you can do if you're considering invoice factoring but you're worried about the cost is to speak with a trusted, FCA-approved partner like InvoiceWise, with a 95% approval rate and 48-hour payouts.