How Much Does Invoice Factoring Cost?

The headline rate on an invoice factoring quote tells you less than half the story. Factoring is priced across at least two main components, and comparing providers on a single number will almost always lead to the wrong decision.

For most UK SMEs, the all-in annual cost of an invoice factoring facility runs between 1.5% and 5% of the value of invoices funded, depending on turnover, sector, customer quality, and how much of the facility is used. In cash terms, a business with £500,000 annual turnover and an average debtor balance of £60,000 would typically pay between £4,000 and £9,000 a year in total. Here is how that number is built and what moves it up or down.

The two main cost components

Every factoring facility is priced across a discount rate and a service fee. Understanding both is essential before comparing providers.

The discount rate is the interest charge on the advance. It is calculated daily on the outstanding balance, like an overdraft, and is typically quoted as the Bank of England base rate plus a fixed margin. For factoring, the all-in annualised rate generally falls between 2% and 4%. This is the cost of borrowing the advanced funds for the period between the advance and your customer's payment, typically 30 to 90 days.

The service fee covers the lender's credit management work: sending payment reminders, managing aged debt, and chasing overdue invoices directly with your customers. It is calculated as a percentage of your total monthly invoiced turnover, not just the invoices you fund. For factoring, expect 0.5% to 2.5% of turnover. This fee is what most distinguishes factoring from invoice discounting, where the lender does not manage collections and the equivalent charge is 0.2% to 0.5%.

What a factoring facility typically costs

Numbers make the components easier to judge.

Take a business with £500,000 annual turnover invoicing monthly, with an average debtor balance of £60,000 and customers paying on 60-day terms:

• Discount rate at 3%: 3% per annum on £60,000 = £1,800 in interest per year

• Service fee at 1.2% of turnover: 1.2% of £500,000 = £6,000 per year

• Total: £7,800 per year, or around £650 per month

At the lower end of market rates for the same business:

• Discount rate at 2%: £1,200 per year

• Service fee at 0.6%: £3,000 per year

• Total: £4,200 per year, or £350 per month

The gap between the best and worst quotes for the same business can be several thousand pounds a year. That is why comparing providers on a full fee breakdown matters rather than accepting the first quote you receive.

What affects your factoring quote

Several factors move your rate up or down:

• Turnover volume: larger facilities tend to attract lower service fee percentages, as the lender spreads fixed costs over more invoicing

• Sector risk: sectors with higher bad debt rates, including construction and some professional services, may attract higher rates

• Customer creditworthiness: a ledger of well-rated clients is lower risk and typically priced accordingly

• Advance rate: drawing 90% of invoice value costs slightly more than drawing 80%

• Non-recourse protection: transferring bad debt risk to the lender adds 0.3% to 0.8% to the service fee

• Contract length: longer minimum terms sometimes come with lower rates; shorter terms give more flexibility at a higher cost

How to compare factoring quotes properly

Ask every provider for a full written breakdown before committing. The figures to compare are the discount rate, the service fee percentage, the minimum monthly fee (some lenders charge this regardless of activity), audit fees (lenders periodically verify your invoices), and early termination penalties.

Apply those figures to your own turnover and average debtor balance to produce a total annual cost you can compare like for like. A quote with a low discount rate but a high service fee or a stiff minimum monthly charge can easily cost more overall than one with a higher headline rate. Compare the complete picture, not the number providers lead with.

You can get an invoice factoring quote through HowMuch and compare options from multiple providers on the same inputs.

Frequently asked questions

Is invoice factoring more expensive than a bank overdraft?

The headline rate often looks higher, but the comparison is not direct. A bank overdraft charges interest only when drawn and carries no credit management cost. Factoring includes active collections management in its fee. If your business would otherwise need to employ a credit controller or spend significant time chasing invoices, the real cost difference is smaller than the rates alone suggest.

Can I negotiate my factoring fees?

Yes. As your turnover grows and your payment record demonstrates reliability, your rates should come down. Providers will reduce fees to retain a growing client. Review your terms at least annually and get competing quotes before your renewal. Lenders respond to evidence that you are comparing the market.

Are invoice factoring fees tax-deductible?

Yes. Both the discount rate and the service fee are treated as business expenses and are deductible against corporation tax or income tax depending on your business structure. Speak to your accountant about how to classify the different fee components in your accounts correctly.

Does the Bank of England base rate affect my factoring costs?

Yes. Most discount rates are quoted as the base rate plus a fixed margin, so when the base rate changes, your cost of borrowing changes with it. Check your contract to confirm whether the margin is fixed for the term and whether there is a rate cap, as not all contracts include one.