The short answer
- Invoice factoring costs usually come from two charges, a service fee and a charge on the money you draw, plus any set-up, minimum or exit fees.
- The advance rate is the share of each invoice paid up front. A higher advance means you borrow more, so the charge on it is higher.
- How quickly your customers pay changes the total cost, because the charge builds up for as long as the money is advanced.
- Compare providers on the total cost over a typical month, not on a single headline percentage.
Invoice factoring costs are usually made up of a few separate charges rather than one price. Understanding each one makes it much easier to compare offers, whether you are looking at invoice factoring or invoice discounting. This guide explains the main fees, what moves them, and shows an illustrative example.
The main charges
Most arrangements combine two charges:
- A service fee. This covers running the account and, with factoring, collecting payments from your customers. It is usually a percentage of the invoice value or of your turnover through the facility.
- A discount charge. This is the cost of the money you draw before your customer pays, similar to interest. It is often priced as a margin over a benchmark rate and builds up for as long as the money is outstanding.
Other fees to look for
- Set-up or arrangement fees at the start
- Minimum monthly fees, which apply even in a quiet month
- Fees for extra services, such as credit checks on customers or payment transfers
- Exit or early termination charges if you end the agreement before the end of the term
What is the advance rate?
The advance rate is the share of each invoice paid to you up front. Providers commonly advance a large share of the value, then release the balance, less charges, once your customer pays. A higher advance gives you more cash sooner, but you are borrowing more, so the discount charge is higher too.
An illustrative example
These figures are made up to show how the charges fit together. They are not a quote or a typical rate.
| Example | |
|---|---|
| Invoice value | £10,000 |
| Advance rate | 85%, so £8,500 paid up front |
| Service fee | 1% of the invoice, £100 |
| Discount charge | 6% a year on £8,500 for 45 days, about £63 |
| Total cost | About £163, or around 1.6% of the invoice |
If the customer takes 90 days instead of 45, the discount charge roughly doubles, so the total cost rises. That is why the speed of your customers' payments matters.
What changes the cost
- How quickly your customers pay. Slower payment means the charge builds up for longer.
- Who your customers are. Providers look closely at who owes you money.
- Your turnover and the number of invoices. Larger, steadier facilities can sometimes be priced differently.
- Factoring or invoice discounting. The service element differs. Our guide to invoice factoring vs invoice discounting explains how each works.
Questions to ask a provider
- What is the total cost on a typical month, including every fee?
- What is the advance rate, and what is the discount charge based on?
- Is there a minimum monthly fee or a minimum term?
- What does it cost to leave early?
- Which invoices or customers are excluded?
If you are chasing late payers first, our guide to customers paying late covers steps that cost nothing.
Getting help comparing
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Common questions
- How much does invoice factoring cost?
- It depends on your turnover, how quickly your customers pay and the provider. Costs usually combine a service fee and a charge on the money you draw, plus any set-up, minimum or exit fees. Ask each provider for the total cost on a typical month so you can compare.
- Is invoice discounting cheaper than factoring?
- The service fee is often lower for invoice discounting because you collect payments yourself, but it depends on the provider and your business. Compare the total cost of each arrangement.
- What is an advance rate?
- The advance rate is the share of an invoice's value that the provider pays you up front. Providers commonly advance a large share, and the rest is released, less charges, when your customer pays.
- What fees should I watch for?
- Look for set-up fees, minimum monthly fees, fees for extra services and charges for ending the agreement early. Ask for all of them in writing before you proceed.
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Check my optionsThis guide is general information for UK businesses. It is not financial advice, and business funding must be repaid. Kapitl Business Finance Limited is a commercial finance broker, not a lender; all funding is subject to eligibility and credit assessment.