Key facts: Invoice finance charges two fees: a service fee (typically 0.2–3% of turnover — admin and, in factoring, collections) and a discount fee (interest on funds drawn, commonly base + 1.5–3.5%). Factoring costs more than invoice discounting because the lender runs your collections. Watch-list clauses: minimum fees, concentration limits, disbursements and exit terms.
The two-fee structure
The service fee is charged on turnover put through the facility, covering administration — and in factoring, full credit control and collections, which is why factoring's fee runs higher than discounting's. The discount fee is simply interest on the cash you've actually drawn, day-counted like an overdraft. Selective (single-invoice) finance rolls both into one flat percentage per invoice — pricier per pound, but with zero commitment.
A worked example
A business with £600,000 annual turnover uses discounting: 85% advance rate, 0.5% service fee, discount at ~8% annual on drawn funds. Service: £3,000/year. Drawings: if on average £85,000 is advanced across the year, discount interest ≈ £6,800. All-in ≈ £9,800 — about 1.6% of turnover — for cash arriving on invoice day rather than day 45+. Factoring the same book might run 1.5–2% service (£9–12k) plus similar discount — with collections labour taken off your desk in return.
Where quotes diverge from bills
The clauses that inflate real costs: minimum service fees (quiet months still bill); concentration limits (over-reliance on one customer caps funding); disbursements — same-day transfer fees, credit checks, audit charges; refactoring/recourse fees when invoices age past 90 days; and notice periods that make leaving slow. Two identical headline quotes can differ by thousands once these bite — demand the full tariff sheet and a projected annual cost at your volumes before signing.
Is the cost worth it?
Price it against the alternative: an overdraft (cheaper but small and revocable), a loan (fixed, not scaling with sales), or the cost of not having cash — declined orders, missed supplier discounts, your hours spent chasing. For growing B2B businesses whose cash is trapped in 30–90 day terms, ~1–3% of turnover for liquidity that scales automatically is frequently the best-value working capital available.
Getting a true comparison
A specialist will normalise quotes across providers — all clauses priced in at your volumes — and match factoring vs discounting to how you run collections. Find a business finance specialist through Nesto — free, no obligation.
Frequently asked questions
What does invoice finance typically cost overall?
Commonly 1–3% of funded turnover all-in, varying with volume, customer quality and factoring vs discounting.
Why does factoring cost more than discounting?
The provider runs credit control and collections — you're buying an outsourced function alongside the funding.
What's an advance rate?
The share of each invoice paid upfront — typically 75–90%, remainder (minus fees) on customer payment.
What clauses should I check before signing?
Minimum fees, concentration limits, disbursement tariffs, recourse terms on aged invoices, and notice/exit provisions — the real-world cost lives there.