What Is A Discount Fee or Charge In Invoice Finance?
If you use an invoice finance facility for your business, you will usually pay a discount fee, sometimes called a discount charge. The discount fee is the interest charged on money drawn down under the facility. It is normally quoted as an annual rate, calculated daily on the balance you actually use, although how it is calculated varies from lender to lender.
How the discount fee is quoted and what it costs
Most lenders quote it as a margin over base rate, commonly 2% to 5% over, with the margin set by facility size, sector and the quality of the debtor book. Larger facilities attract lower margins. A few lenders quote a flat rate instead, which looks simpler but is harder to compare.
Because it accrues daily on the drawn balance, it behaves like an overdraft rather than a loan. Draw £100,000 for ten days and you pay ten days of interest, not a month. That is also why a facility that looks expensive on the headline margin can work out cheaper than one with a low margin and a high service fee, if you draw sparingly.
The discount fee is not the whole cost
This is the point most comparisons miss. The discount fee sits alongside a separate service fee, charged as a percentage of turnover, typically 0.5% to 3%, which pays for credit control and ledger management. On most facilities the service fee is the larger of the two.
Then there are the fees that only appear in certain circumstances: refactoring fees on invoices that go past the approval period, audit fees, CHAPS and same day transfer charges, minimum monthly fees where turnover falls short, termination fees, and a collect out fee if the business enters a formal insolvency.
Two quotes with the same discount fee can differ substantially once all of it is added up, which is why the effective cost against actual drawdown is the only fair comparison.
Related terms
See also advance rate, the percentage of each invoice you can draw, and recourse period.
For a full breakdown of every charge a facility can carry, see the costs of factoring, or invoice finance for how the facilities work.
Bolton Business Finance is a whole of market commercial finance broker. We compare facilities on total cost, not headline rate. Call 0161 546 9128.
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