What does “Advance Rate” mean in invoice finance and factoring?
Most invoice finance and factoring facilities have what is called an advance rate. This is the percentage of each invoice that the finance company will let you draw down under the facility.
Advance Rate Example
If your advance rate is 80%, this means you can access 80% of an unpaid invoice.
Invoice amount: £20,000
Advance rate: 80%
Available funding: £16,000
The remaining 20% is held back and paid to you when your customer settles the invoice, less the lender’s fees.
What advance rate you can actually expect
Across the UK market advance rates typically run from 70% to 90%, with 80% to 85% the common position on a straightforward debtor book. A few lenders quote 90% or above, usually on strong books with blue chip debtors.
Four things move it. Debtor concentration is the biggest, because a book where one customer is 40% of the ledger will be funded more cautiously than a spread of fifty. Sector matters next, with construction and recruitment treated differently from standard commercial supply because of contractual claims and applications for payment. Debtor quality and payment history come third. Your own trading history comes last, which surprises people, because the lender is underwriting your customers more than it is underwriting you.
The headline advance rate is also not the whole picture. Concentration limits, disapprovals for aged or disputed invoices and a funding limit on individual debtors can all reduce what you actually draw. A facility quoted at 90% can deliver less cash than one quoted at 80% with cleaner terms, which is why the rate on its own is a poor way to compare offers.
Related terms
See also discount fee, the interest charged on what you draw, and recourse period, the point at which an unpaid invoice comes back to you.
To compare facilities properly, see invoice finance, or the costs of factoring for how the advance rate sits alongside the other charges.
Bolton Business Finance is a whole of market commercial finance broker. We can get quotes, negotiate offers and set up a new facility. Call 0161 546 9128.
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