Invoice financing can be a fast way to raise funds by releasing the capital tied up in your unpaid invoices.

Nearly 25% of business owners have delayed paying themselves, and 23% have delayed paying their suppliers due to the time it takes their customers to pay.

You can use Invoice Finance to bridge the gap between raising an invoice and getting paid. It’s a flexible way to boost working capital. But like all types of financing, there are costs involved.

In this guide, we’ll break down the costs of invoice financing so you can see if it’s a good option for your business.

What Is Invoice Finance?

Invoice Finance is a type of business lending that enables you to use your outstanding invoices as collateral to secure financing. Instead of waiting for 30+ days for your customer to pay your invoice, you can submit it to a finance company for funding.

The finance company will review the invoice and provide a cash advance of up to 95% of the invoice value. When your customer pays the invoice, you receive the remaining balance of the invoice less fees.

Lenders will also only fund invoices if the customer is creditworthy. They may reject an invoice if there is too much risk.

What Is the Difference Between Invoice Factoring and Discounting?

There are two main types of Invoice Finance: factoring and discounting.

Both types of Invoice Finance enable businesses to leverage their accounts receivables for funding, but there are some key differences.

With invoice discounting, you are responsible for collecting the unpaid invoice, and the funding facility is usually confidential.

With invoice factoring, the finance company will take care of the collection of the invoice. They will be in direct contact with your customer, so your customer will know about the funding facility.

Read our guide on Invoice Discounting vs. Factoring to learn more about the different types of invoice financing.

Now that we’ve covered the basics, let’s take a look at the cost of Invoice Finance.

The Cost of Financing an Invoice

There are lots of factors that add up to the total cost of financing an invoice. If you get a quote from a lender, you can expect to see the following costs included:

Discount Fee or Interest Fee

You will be charged interest for the time that your invoice is outstanding. This is often called a discount fee and makes up a large percentage of the overall cost of Invoice Finance.

The interest rate can vary according to several factors we’ll cover later in the guide. Generally, invoice financing interest rates are around 10% per annum.

Service Fee

The service fee is a flat fee that is usually between 0.5-1.5% of the total invoice value. This is a set fee that isn’t impacted by how long it takes your customer to pay.

If the service fee on a $40,000 invoice is 1%, the cost will be $400 if it takes your customer three weeks or three months to pay the invoice.

Advance Rate

The advance rate isn’t a cost, but it is something you should pay attention to. The advance rate is the total amount you will receive upfront after your invoice is approved for financing.

If you submit an invoice with a total value of $50,000 and the lender offers an 80% advance rate, you will receive $40,000 as a cash advance. The remaining balance, less fees, will be released once the customer has paid the invoice.

Example Calculations for the Cost of Invoice Finance

Let’s look at an example to see how the overall cost of Invoice Finance is calculated.

A business wants to improve cash flow by releasing the capital tied up in outstanding invoices with a total value of $50,000.

The business submits the invoices to the lender and agrees to an 80% advance rate, so the lender provides $40,000 as an upfront cash advance.

The service fee for the facility is 1%, so the cost is $500.

The discount rate is 8% per annum, and the customer pays the invoice after 60 days.

Total discount rate fees:

($50,000 x 8%) x (60/365 days) = $657.53

  • Service Fee: $500
  • Discount Fee: $657.53
  • Total cost of invoice financing: $1157.53

Alongside these costs, there may also be additional account management, collections, and establishment fees, depending on the terms of the facility.

Bad Debt Protection

Bad Debt Protection is an extra service that isn’t usually included in an invoice financing facility. The service offers additional protection if a customer is unable to pay an invoice that has been financed.

With Bad Debt Protection, the finance provider will take on most of the risk so that your finances are protected if a customer is unable to pay.

Bad Debt Protection is usually charged as a percentage of the total invoice value. The rate can vary according to the creditworthiness of your customers.

What Factors Influence the Cost of Invoice Financing?

The cost of invoice financing can vary depending on the business submitting the invoices and its customers.

Here’s a breakdown of the different factors that can affect the cost of financing:

Your Customer’s Creditworthiness

The more creditworthy your customers, the less risk involved for the lender. The financing company will look at your customer’s credit rating and history of paying on time as part of the due diligence process before agreeing to finance an invoice.

Your Business Credit Rating and Trading History

The lender will review your financial documents to determine if your company is a good candidate for Invoice Finance. They will also look at your industry when assessing your business for funding. 

Unlike traditional property-secured bank loans, Invoice Finance is accessible to businesses that don’t have a perfect credit rating or extensive trading history. 

Alternatives to Invoice Finance

Invoice Finance can be a fast and straightforward way to increase working capital and cover cash flow gaps. But it isn’t suitable for all businesses.

Depending on the reasons for seeking finance and your unique business circumstances, you may benefit more from Asset Finance or a Trade Finance facility.

Asset Finance

Asset Finance helps businesses to fund the purchase of new equipment, machinery, and vehicles. If you need to make a large purchase to grow your business, you can use Asset Finance to cover the upfront cost.

You can start using the asset immediately and spread the investment cost over a more extended period. Funding terms range from 24 to 60 months.

Trade Finance

Trade Finance is a type of business funding that helps you release capital tied up in the supply chain. You can use Trade Finance to pay your domestic and international suppliers upfront so that you can get the raw materials, inventory, and stock you need to grow your business.

With increased purchasing power, you can also negotiate early payment and bulk buying discounts to increase your margins and boost your profits.

You can find out more about Trade Finance and how it can help your business in our guide, What Is Trade Finance?.

Financing Your Business With ScotPac

Invoice Finance can be a cost-effective way to finance your business. You can get the cash injection you need to overcome cash flow gaps and keep your business growing.

Here at ScotPac, we provide simple and transparent business finance. We are a trusted growth partner of 1000s of SMEs in Australia and New Zealand – our clients grow three times faster than the average business.

As Australia’s largest invoice finance provider, we provide the most competitive pricing. Give us a call on the number below or fill in our online enquiry form, and we’ll be in touch shortly to help you find a funding solution that’s right for your business.