Invoice Factoring Cost Calculator
Convert a factoring discount rate into a genuine annualised cost, compare recourse and non recourse pricing, and check it against an early payment discount or a line of credit.
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A small percentage over a short period is a large annual rate
Invoice factoring is quoted as a discount rate, commonly two to five percent of the invoice face value. Because the money is only outstanding for the days until the customer pays, that percentage converts into an annualised rate far higher than it appears. Three percent for a thirty day advance is roughly thirty six percent a year, and the same three percent for a fifteen day advance is over seventy percent. The quoting convention hides this, which is why the annualised figure is the only one worth comparing against a bank facility.
The fee structure matters as much as the rate
Many agreements charge the discount per fifteen or thirty day period, so an invoice paid at day forty five incurs two or three periods rather than one and a half. Others add an application fee, a monthly minimum volume fee, a wire fee per advance and a termination penalty. The all-in cost of a facility with a two percent headline rate and a monthly minimum can exceed one quoted at three and a half percent with no extras, and the comparison is impossible without modelling the actual invoice profile.
Compare it against the alternatives honestly
Factoring is expensive relative to a bank line and much cheaper than not being able to make payroll. It is also often cheaper than the early payment discount many suppliers already offer: two percent for paying twenty days early is roughly a thirty seven percent annualised rate, which means a business offering that discount is already funding itself at factoring rates. The calculator puts all three on the same annualised basis so the decision is made on comparable numbers.
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Frequently Asked Questions
Why is the annualised rate so much higher than the discount rate?
Because the discount is charged for a short period. A 3 percent fee on money outstanding for 30 days annualises to roughly 36 percent, and to over 70 percent if the invoice pays in 15 days. The shorter the period, the higher the annual equivalent.
What is the difference between recourse and non recourse?
With recourse, you buy back an invoice the customer does not pay. Non recourse means the factor absorbs that credit loss, usually only for specified insolvency events rather than any non payment, and it costs more. Read what the non recourse actually covers.
What is the reserve?
The portion of the invoice not advanced up front, commonly 10 to 30 percent. It is released when the customer pays, less the fees. Your effective cost of funds is the fee measured against the amount actually advanced, not against the invoice face value.
Are there hidden fees?
Commonly: application and due diligence fees, monthly minimum volume charges, wire or ACH fees per advance, lockbox fees, and early termination penalties on a term agreement. The headline discount rate is frequently the smaller part of a facility’s real cost.
When does factoring make sense?
When the alternative is turning away work, missing payroll or paying suppliers late, and when the gross margin on the funded work comfortably exceeds the annualised cost. It is working capital of last resort priced accordingly, not a substitute for a bank facility you could obtain.
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How to Use
Enter the invoice amount, advance rate, fee structure and expected payment days.
Disclaimer: This tool is provided "as is" without warranty of any kind. Results are for educational and utility purposes.
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