Finance Calculator
Factoring Cost Calculator
Estimate the annual and monthly cost of an invoice factoring facility. Enter your turnover, debtor days, and typical fee rates to see a detailed cost breakdown.
Enter your factoring details
What is Factoring Cost?
Factoring cost is the total expense of using a factoring facility, including the discount charge (interest on funds drawn) and the service fee. Understanding the true cost helps businesses compare factoring against other funding options.
How are factoring costs calculated?
Invoice factoring costs are made up of two main components: a service fee charged on turnover and a discount charge (interest) on the funds drawn. The total cost depends on your sales volume, how quickly your customers pay, and the rates agreed with your provider.
The key steps in the calculation are:
- Average outstanding debtors: The typical amount owed to you at any point, derived from turnover and debtor days.
- Service fee: A flat percentage of annual turnover covering credit control and administration.
- Discount charge: Interest on the funds actually advanced, calculated using average drawn funds and debtor days.
The formulas used in this calculator are:
Avg Outstanding Debtors = Turnover × (Debtor Days ÷ 365)
Avg Funding Available = Avg Outstanding Debtors × Advance Rate
Annual Service Fee = Turnover × Service Fee %
Annual Discount Cost = Avg Funding Available × Discount Rate × (Debtor Days ÷ 365)
Total Annual Cost = Service Fee + Discount Cost
Assumptions and caveats
- •The service fee and discount charge rates used are illustrative. Actual terms depend on provider, turnover volume, sector, and debtor quality.
- •This calculator assumes all turnover is factored. In practice, some invoices may be excluded.
- •The discount charge estimate uses average debtor days as a proxy for how long funds are drawn.
- •Additional costs such as minimum fees, setup fees, audit charges, credit protection premiums, or termination fees are not included.
- •Results are indicative only. Contact a specialist for a formal quotation.
Worked Example
Scenario
A business factors GBP 50,000 of invoices with a service fee of 1.5% and a discount charge of 3.5% per annum. The average collection period is 45 days.
Calculation
- Service Fee = 50,000 x 1.5% = GBP 750
- Discount Charge = 50,000 x 3.5% x (45/365) = GBP 216
- Total Factoring Cost = 750 + 216 = GBP 966
- Effective Cost = (966 / 50,000) x 100 = 1.93%
What This Means
The total cost to factor GBP 50,000 of invoices is GBP 966, or 1.93% of the invoice value. This provides immediate cash flow of approximately GBP 42,500 (at 85% advance rate) rather than waiting 45 days. For businesses with tight cash cycles, this cost is often outweighed by the benefits of faster cash collection, reduced credit risk, and improved supplier payment terms.
Frequently asked questions
Invoice factoring is a form of business finance where a company sells its outstanding invoices to a factoring provider at a discount. The provider advances a percentage of the invoice value upfront (typically 70-90%) and takes over credit control, collecting payment directly from the customer. The balance, minus fees, is released once the customer pays.
Both release cash from outstanding invoices, but with factoring the provider manages credit control and collects payments from your customers directly. Invoice discounting is confidential - your customers are unaware of the arrangement, and you retain control of collections. Factoring typically suits smaller businesses or those wanting to outsource credit management.
The service fee (also called the factoring fee or administration fee) is a percentage of your total turnover processed through the facility. It covers the cost of credit control, collections, and administration. Typical service fees range from 0.5% to 3% of turnover depending on volume, sector, and debtor quality.
Factoring costs vary widely depending on turnover volume, debtor quality, sector risk, and the provider. While the headline fees may appear higher than a traditional overdraft, factoring provides additional services such as credit control, bad debt protection (if non-recourse), and scales with your sales. Many businesses find the total cost competitive when these benefits are considered.
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