Invoice financing costs: What impacts the fees?

90 days to get paid? 120 days? Who can wait that long? Invoice financing costs are a small price for unlocking the cashflow your business needs right now. Don't let late payments hold you back.

This guide explains everything you need to know about invoice financing fees to access the capital tied up in your unpaid invoices and seize opportunities immediately.

What is invoice finance (IF)?

Invoice financing (also known as invoice factoring) empowers businesses by advancing funds against unpaid invoices. This alternative funding option provides immediate access to much-needed capital.

Many businesses, particularly international trade suppliers, need help with delayed payment terms. They often must wait 60, 90, or even 120 days for payment.

Yet these same businesses face pressure to pay their suppliers promptly and require consistent cashflow to capitalize on growth opportunities. Invoice financing offers immediate relief, granting companies instant access to funds tied up in their accounts receivable.

Unlock your cashflow today. Learn more about invoice financing in our in-depth guide or watch our introductory video below.

What are invoice financing costs?

Invoice financing costs are the fees charged by finance providers for their services. Businesses work with financing providers to increase their working capital by advancing their accounts receivable. In return, they agree to pay a small fee, typically charged as a percentage of the value financed by the provider.

What is the average cost of invoice factoring?

Invoice financing costs are calculated as a percentage of the total financing amount. More significant financing needs will naturally incur more substantial fees.

However, these costs may also be determined by the duration of the financing agreement and the financial track record of the business and its customers – all factors that feed into how much invoice factoring costs.

These elements influence the level of risk assumed by the finance provider, impacting the invoice financing cost structure. Generally, you can pay a factoring fee between 1% to 5% per month's invoice value. So, for a $10,000 invoice, your factoring cost could range from $100 to $500 per month.

Example of invoice financing fees

Let’s say Zenith Solutions delivers a shipment to Terra Firma Imports. Zenith invoices them for $10,000 with a 90-day payment term.

However, Zenith needs immediate cash and turns to a financing company to present the invoice. The financing company agrees to advance Zenith 80% of the invoice value ($8,000). In exchange, Zenith concurs with an invoice factoring fee of 1.5% on the advanced amount.

The financing company then wires $8,000 to Zenith's account within 48 hours of finalizing the necessary paperwork.

Finally, when Terra Firma Imports settles the $10,000 invoice 90 days later, Zenith repays the financing company. This repayment includes the $8,000 advance plus the agreed-upon 1.5% fee, totaling $120.

Invoice discounting vs. invoice factoring

Both invoice discounting and invoice factoring provide businesses with immediate cashflow by using unpaid invoices as leverage. The key distinction lies in who manages the collection of outstanding payments.

Invoice discounting: Imagine presenting an outstanding invoice and receiving an immediate advance, typically 80-90% of its value. You retain control by collecting payment from your customers directly. Once they pay, you repay the advanced amount plus a small, predetermined fee.

Invoice factoring: Here, the process shifts. Instead of advancing funds, the provider purchases the unpaid invoice outright, usually at 80-90% of its value. They then take responsibility for collecting payment from your customer. Your customer pays them directly, and they, in turn, forward the remaining balance to you minus a pre-agreed fee.

While similar, these distinct approaches influence costs. Since the provider assumes the collection burden and any risk of customer non-payment in invoice factoring, this service may involve slightly higher fees than invoice discounting. 

However, as you'll see next, the precise cost of any invoice financing arrangement depends on various factors.

Are you curious if it’s the right fit for your business? Dive deeper into the specifics of invoice factoring for small businesses and discover its benefits.

What can impact invoice financing costs?

Several key factors influence the invoice factoring fee a provider charges:

• Finance period length: Providers charge higher fees for longer finance periods (e.g., a 90-day term versus a 30-day term)
• Finance amount: Providers increase fees as the financed sum grows (e.g., funding $100,000 versus $10,000)
• Invoice financing agreement type: The agreement type dictates the risk the provider assumes, impacting the fee (e.g., recourse agreements or non-recourse agreements)
• Invoice volume: Businesses processing multiple invoices may receive discounted fees from providers
• Perceived risk: Providers determine the perceived financing risk through background checks, with higher risk leading to higher fees
• Relationship with the provider: Long-term, trusted relationships can earn reduced fees from financiers

What other invoice financing fees are there?

Invoice financing costs vary among providers. Some opt for a simple, standard service fee, while others incorporate additional administrative fees.

Here are potential fees associated with invoice financing:

1. Discounting charge

This interest fee, applied to advanced funds, typically ranges from 1.5% to 3% above a base rate. The calculation considers the payment period length. For example, advancing $8,000 at 1.8% above a 2.25% base rate for 40 days results in: (($8,000 x (1.8% + 2.25%)) / 365) x 40 = $35.51.

2. Application fees

Providers might demand a one-time fee upfront to cover the administrative costs of processing your application, performing initial assessments, and setting up your account.

3. Due diligence/credit check fees

Providers conduct due diligence on your business and sometimes your customers to assess the risk involved in financing your invoices. This process may include credit checks, financial reviews, and background research.

4. Collection fees

While the goal is always prompt payment, some providers charge for the administrative tasks involved in collecting payments from your customers if delays occur.

5. Overdue fees

When a customer fails to pay an invoice on time or defaults on payment, overdue fees cover the provider's increased risk and administrative burden in recovering the funds.

6. Termination fees

Should you choose to end your financing agreement before the agreed-upon term, be aware that providers may include termination fees to compensate for the lost interest revenue they anticipated over the entire term of the contract.

Beyond invoice financing costs: Unlocking your growth

Invoice financing can seem complicated, but it doesn't have to be. Here's a quick breakdown:

• Invoice financing providers typically charge fees as a percentage of the amount you borrow
• This percentage varies depending on factors like the amount you borrow and the risk to the financier
• While similar, invoice discounting and factoring are distinct services with different costs and fees
• Invoice financing services may include additional fees for applications, background checks, late payments, or contract termination

Don't let fees stand in the way of your ambition, though. At Stenn, we believe in being upfront about costs because your success is our success. We win when you win. That's why we make invoice financing simple and honest.

Four steps. 48 hours. Growth unlocked.

1. Register your business (it takes minutes)
2. We'll set your credit limit
3. Send us a few documents
4. Funds hit your account

Turn outstanding invoices into growth. Get funded with Stenn.