Invoice Finance Fees

Invoice finance fees typically consist of two elements: the service fee (sometimes called the factoring fee) and the discount charge (which represents interest on the funds advanced). These combine to form your total borrowing cost.

The service fee (factoring fee)

The service fee (sometimes referred to as the factoring fee or administration fee) covers the administration and management of your facility. It pays for ledger management (if using factoring), credit control, and account servicing. Most lenders calculate this as a percentage of your total invoice value.

Typical ranges:

• Invoice factoring: 0.5% – 3.0% of the invoice value
• Invoice discounting: 0.5% – 1.5% of the invoice value

This fee is usually charged monthly and may include a minimum usage requirement. Smaller firms or businesses with less predictable invoice volumes may face higher rates.

Example:
A construction firm factoring £200,000 per month at 1.5% pays £3,000 in service fees, excluding interest.

The discount charge (interest rate)

The discount charge is the interest you pay on the funds drawn against invoices. It covers the cost of borrowing the money for the period the funds are outstanding.

The fee is calculated as an annual percentage rate (APR) on the advanced funds, typically calculated on a daily basis but paid monthly. Therefore, the longer your customer takes to pay the invoice, the greater the discount charge you will accrue.

Most lenders calculate this fee using the Bank of England base rate or SONIA (Sterling Overnight Index Average).

For lower-risk, well-established businesses, discount margins are often around 2% – 3.5% over the Bank of England base. For smaller or higher-risk firms, margins can rise to around 4% – 6% above the base.

Factoring vs. Discounting: How Does the Cost Differ?

The primary difference in cost between invoice factoring and invoice discounting lies in the level of service provided.

Established businesses with higher turnover and solid in-house credit control.

Factoring can work out more expensive because it includes debtor management and collections. Discounting is cheaper but requires robust internal finance processes.

6 fees invoice finance lenders often hide

Hidden fees can substantially affect your overall cost of using invoice financing. Some are unavoidable; others can be negotiated or waived.

1. Arrangement or setup fees

Arrangement fees are a one-off charge to cover the initial administrative and legal work required to set up the facility, including audits and document preparation.

The fees are most often charged as a percentage of the total funding facility, typically within 1% – 2%. Approximately 20% of invoice providers charge these fees as a fixed fee instead which can range from a few hundred to several thousand pounds.

Some lenders offset or waive this fee for high-value clients.

2. Minimum volume fees

Some contracts require you to finance a minimum value of invoices per month, quarter, or year.

If your monthly invoice volume drops below an agreed level, the provider charges you a “top-up” fee to meet the service charge target, even if you haven’t utilised the full facility. The minimum volume fee can cost several hundred pounds monthly.

For example:

• Facility minimum: £100,000 per month with a 1% service fee.
• Actual use in one month: £60,000.
• Fee: £1,000 is still charged as there was a £1,000 minimum fee (1% of £100,000).

Be aware that a small number of invoice finance providers quote a minimum monthly fee that exceeds the fee expected to be earned if the expected invoice totals are achieved. This means you would still be subject to a monthly minimum charge even if you met your minimum monthly invoice amount. In the example above, they may charge a minimum fee of £1,100.

You need to be wary of this when comparing quotes to ensure that a low service charge percentage is not superseded by a higher minimum charge that will be due.

3. Reconciliation fees

Reconciliation fees are small administrative charges for resolving discrepancies, processing manual requests, or handling specific non-standard transactions in your account. Examples include processing a misallocated customer payment, resolving a complex credit note, or correcting errors made in submitting the ledger.

Reconciliation fees are charged only when a specific event requires extra effort to reconcile your accounts, and they are usually listed separately as a “disbursement” or “ancillary” fee. It is usually a fixed charge per incident or per hour of work (e.g., £25 per misposted payment).

4. Maintenance fees

A maintenance fee, also known as a management fee, is an alternative or supplemental charge for administration. It is usually a fixed monthly or annual charge, or a percentage of your overall facility limit.

• Fixed fee example: A flat £50 charge is applied every month, regardless of the number of invoices you finance.
• Fixed fee based on limit example: 0.1% of your £200,000 facility limit, charged monthly.

It covers the minimum cost of keeping your account open and the facility available, even if you have a low usage month.

Note: the maintenance fee (fixed /base administrative cost), which is charged monthly, differs from the service fee (the primary administrative cost), which is charged every time you submit an invoice (or against total monthly turnover).

5. Termination and notice fees

Ending an invoice finance facility early often requires 3-6 months’ notice or a flat termination charge.

The termination fee can be severe, sometimes amounting to a percentage of your remaining projected service fees or a fixed lump sum. Review the exit clause before signing the contract.

6. Bad debt protection and non-recourse costs

Bad Debt Protection (BDP), also known as Non-Recourse,  is a financial product, often an add-on to invoice finance, that provides a safety net against a customer failing to pay due to insolvency or default.

It is a popular alternative to taking out a credit insurance policy, which can be more expensive.

The cost of the bad-debt protection/non-recourse option starts at around 0.35% of the invoice total funded and can be as high as 1%. The level you are quoted will depend on the type of facility that you require and the nature of your business. It can be worthwhile for sectors with high concentrations of debtors.