Cost of factoring invoices

What is the Cost of Factoring Invoices in the UK?

Factoring can be a powerful way to improve cashflow, but many businesses ask the same question before getting started: what does factoring cost? In this article, we break down the typical fees, what they cover, and how costs are calculated — from the perspective of an independent UK factoring broker.

Understanding Factoring Costs

Factoring is not a one size fits all product. Costs vary depending on your industry, turnover, client base, and how much of your sales ledger you want to factor. However, most UK factoring companies structure costs into two main parts:

Service Fee (or Administration Fee)
Discount Fee (or Interest Fee)

1. Factoring Service Fee

The service fee covers the operational cost of managing your invoices. It includes:

Credit control
Sales ledger management
Customer payment chasing
Account management and reporting

Typical Range: 0.75% to 2.5% of the invoice value

The exact percentage depends on:

Your annual turnover
Number of invoices
Average invoice value
Industry risk level

2. Factoring Discount Fee

The discount fee is essentially interest charged on the advance provided by the factoring company.

Typical Rate: 2% to 5% over base rate (e.g., Bank of England base rate)

This is calculated daily or monthly, depending on how long the invoice remains unpaid. The faster your customers pay, the lower the cost.

Example: Cost Breakdown

Let’s say:

You raise an invoice of £10,000
The factoring provider advances 85% (£8,500)
Service fee is 1.5%
Discount fee is 3.5% per annum (charged daily)
Customer pays in 30 days

Service Fee = £10,000 x 1.5% = £150
Discount Fee = £25-30 (for 30 days on £8,500)

Total Cost = £175-180 for unlocking cash instantly

Other Potential Costs

Depending on the provider, you might also encounter:

Setup Fees – One-off onboarding cost (sometimes waived)
Minimum Usage Fees – If you don’t factor enough invoices
Audit Fees – For periodic checks on your ledger
Termination Fees – If you leave before your contract ends

Always ask for a clear cost breakdown before signing any agreement.

How to Reduce Factoring Costs

Use a Broker – Independent brokers like FactoringBroker.co.uk can help you compare offers and negotiate better rates
Improve Customer Payment Times – Faster payments reduce interest charges
Factor Selectively – Use selective factoring if you only need to fund certain invoices
Maintain Healthy Debtor Ledger – Lower perceived risk = better terms

Is Factoring Worth the Cost?

While factoring isn’t free, it can be well worth the cost if:

You’re growing fast and need working capital
Late payments are stalling operations
You can’t qualify for traditional loans OR more importantly, while a bank loan is a static amount, the factoring availability grows in line with your business growth.

By improving cashflow, you can often take on more orders, pay suppliers early for discounts, or avoid overdraft charges — making factoring a smart financial move.

Cost of Factoring Invoices FAQS

How much does invoice factoring typically cost?

Most UK businesses pay between 1.0% and 5% of the invoice value, combining both the service fee and discount fee.

Are there hidden fees in factoring agreements?

Some providers may include setup fees, audit fees, refactoring fess or minimum usage fees. Always request a full fee breakdown before committing.

Does the cost vary by industry?

Yes. Higher risk industries or those with complex invoices may pay higher service fees.

Can I negotiate the cost of factoring?

Yes. Using a broker allows you to compare multiple providers and potentially negotiate better rates.

Will factoring affect my customer relationships?

With disclosed factoring, customers deal directly with the factoring company, which may not be an issue if handled professionally (as you would expect). For more control, consider confidential invoice discounting.

What happens if my customer pays late?

The longer it takes for your customer to pay, the more discount fee you’ll pay — but the factoring company will handle chasing payments.

Will it cost more to insure my debtors?

Yes, many factors can add this service as an extra if required, giving you peace of mind in the event of non payment.

Speak to an Independent Factoring Broker

At FactoringBroker.co.uk, we help UK businesses find and compare the most cost-effective factoring solutions. As an independent broker, we work with a panel of trusted lenders to find the right fit for your needs.

Get a Free Quote or call 01554 562563 to speak with an expert advisor.

FactoringBroker.co.uk – Clear, Honest Advice on the Real Cost of Invoice Factoring

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