In this article we are going to explore what the costs of factoring are and how much it may cost for a business to use.
Factoring is a type of invoice finance that allows you to borrow against unpaid customer (debtor) invoices.
It is offered by banks and also a large number of specialist lenders. Costs vary based on a wide range of factors. Generally speaking, the higher your turnover, the lower the service fee percentage.
Written by Marcus Wright, owner and founder of Bolton Business Finance Ltd, in financial services since 2008 and a commercial finance broker since 2019. Last reviewed September 2026.
The short answer
Most UK factoring facilities cost between 1.5% and 3% of turnover per year once everything is added together. That figure is made up of two separate charges that are quoted separately and are easy to confuse: a service fee charged on your turnover, and a discount fee charged like interest on the money you actually draw.
Smaller businesses pay a higher percentage than larger ones. A £400,000 turnover business will typically pay closer to 3%, a £1m business closer to 1.5%.
Work out your own numbers
The worked examples on this page use fixed assumptions. Our invoice finance calculator takes your turnover, debtor days, advance rate and fees and returns the total annual cost, what that is as a share of turnover, and the effective annual rate on the money actually advanced to you. It also shows whether the minimum monthly fee is what is really setting your bill.
What Are The Costs Of Factoring?
Different banks and factoring lenders will charge in different ways for a facility. There is no set way of charging but there are common charges associated with taking out a factoring facility.
Here are the most common costs for an invoice factoring facility:
| Charge | Typical range | What it is |
|---|---|---|
| Setup / arrangement fee | 1% to 2% of the facility limit, sometimes nil | Some factoring lenders charge a setup fee, although not all. Whether a setup fee is charged varies between lenders and may depend on the complexity of the case. |
| Service charge | 0.5% to 3% of turnover | This usually accounts for the majority of the cost of a factoring facility. It is charged as a percentage of your invoices or turnover and is often subject to a minimum monthly charge. |
| Discount fee (interest) | 2% to 4% over base, so roughly 5.75% to 7.75% all in | Any money advanced under the facility incurs interest, calculated daily on the balance you have drawn. Quoted as a margin over the Bank of England base rate. |
Watch the discount rate quote. The Bank of England base rate is 3.75%, held on 17 September 2026. A facility quoted at “3% over base” therefore costs 6.75% a year on the drawn balance, not 3%. Older guides written when base rate was near zero quote all-in discount rates of 3% to 5%, and those figures no longer reflect the market.
Other Potential Fees
- Bad Debt Protection (BDP) – This is usually optional and is to cover invoices against non payment. This may also be referred to as recourse or non recourse factoring. A credit insurance policy would usually remove the need for BDP.
- Refactoring Fee – This is only charged when an invoice remains unpaid after an agreed approval period, usually 90 days.
- Credit Note Fee – A factoring facility may or may not include a fee for processing a credit note.
- Annual Review / Renewal – Some lenders may charge an annual renewal or facility review fee.
- Survey Fees – It is also worth double checking if a lender requires mandatory surveys and if so what cost (if any) they may charge.
As mentioned earlier, costs and fees can vary significantly between banks and specialist invoice factoring lenders.
It is worth seeking the help of a professional invoice factoring broker to help negotiate on your behalf.
What The Headline Rate Does Not Include
When a lender quotes “0.9% and 2.5% over base” they are quoting the two main charges only. The items below are where facilities that looked cheap on paper turn out not to be, and they are the things worth asking about before you sign.
| Item | Why it matters |
|---|---|
| Minimum monthly service fee | If your service fee is 1.5% but the minimum is £750 a month, then below £600,000 of turnover you are paying the minimum, not the percentage. On a quiet quarter this is the charge that hurts. |
| Minimum term and notice period | Twelve months with three months notice is common. Leaving early can mean paying the notice period in full, so a cheaper rate on a longer tie-in is not always cheaper. |
| Concentration limits | Most funders cap how much of your ledger one customer can represent, often 25% to 40%. Anything over the cap is not funded, so your effective advance rate is lower than the headline. |
| Disapproved invoices | Invoices past the approval period, in dispute, or to debtors the funder does not like are excluded. You are still paying the service fee on the turnover. |
| Trust account or CHAPS fees | Same day payments are frequently charged per transaction. If you draw down often, this adds up quietly. |
| Audit and survey fees | Periodic audits are standard on larger facilities and are sometimes recharged to you. |
Things That May Influence The Cost Of Factoring
- How much you are borrowing
- The quantity of invoices
- Your particular industry or sector
- Your client’s credit score and worthiness
- Your own credit risk and score
Sector matters more than most people expect. A construction ledger built on applications for payment is priced differently from a straightforward manufacturing ledger, because the debt is harder to verify and subject to certification and retention. Recruitment facilities are priced around a weekly pay and bill cycle. Haulage and courier ledgers often involve self billing, which changes how invoices are verified.
Invoice quantity matters because a lot of the service fee covers administration. A £500,000 ledger made up of twenty invoices is cheaper to run than the same ledger made up of four hundred small invoices, and the pricing usually reflects that.
How Much Does Factoring Cost?
Let us take an example and look at how much an invoice factoring facility might cost for a £1 million turnover business.
This is a real life example from a facility we have set up in the past, with the discount fee brought up to date for the current base rate.
| Projected turnover | £1,000,000 |
| Funding limit | £125,000 |
| Invoice funding percentage | 90% |
| Setup fee (one off) | £500 |
| Service fee | 0.75% of turnover |
| Discount rate | 3% over base, so 6.75% |
If all turnover goes through the facility, and the business runs an average drawn balance of £100,000:
| Service fee | £1,000,000 x 0.75% | £7,500 per year |
| Discount fee | £100,000 x 6.75% | £6,750 per year, about £18.49 per day |
| Total ongoing | Excluding the one off £500 setup | £14,250 per year, 1.43% of turnover |
Now the same exercise for a smaller business, which is closer to the size of enquiry we see most often. Note how the percentage of turnover roughly doubles.
| Projected turnover | £400,000 |
| Average sales ledger | About £66,000 |
| Advance rate | 85%, so about £56,000 drawn |
| Service fee | 1.8% of turnover |
| Discount rate | 3.5% over base, so 7.25% |
| Service fee cost | £7,200 per year, £600 per month |
| Discount fee cost | About £4,060 per year, £338 per month |
| Total | About £11,260 per year, £938 per month, 2.82% of turnover |
Both examples are illustrative and describe facilities of the type we arrange. They are not a quote. The useful comparison is not the headline percentages but the cost as a share of turnover, because that is the number you can weigh against what the cash is worth to you.
Is Invoice Discounting Cheaper Than Factoring?
Usually yes, on the service fee. With invoice discounting you run your own credit control, so the funder is doing less work and charges less for it. The discount fee tends to be similar between the two.
The saving is not free. If you move from factoring to discounting you take back the chasing, the statements and the query handling, which means either staff time or a hire. On a small ledger the service fee saving can be smaller than the cost of the person doing the work. That is why discounting generally suits established businesses with a finance function, and factoring suits smaller and newer businesses without one.
For a fuller comparison, see invoice discounting vs factoring.
How To Compare Factoring Quotes
Two quotes are only comparable once you know these six things. Ask every funder the same questions and put the answers side by side.
- What is the service fee and is there a monthly minimum? The minimum is what you will actually pay in a slow month.
- What is the discount margin and what is it over? Base rate or the funder’s own reference rate, and confirm it is charged on the drawn balance rather than the full ledger.
- What is the advance rate after concentration limits? Not the headline percentage, the effective one on your actual customer spread.
- What is the minimum term and the notice period? And what does it cost to leave early.
- Which invoices are excluded? Approval periods, disputed invoices, export debtors, contra customers.
- What are the transaction charges? Same day payments, credit notes, refactoring, audits.
We do this comparison as a matter of course across our panel, and we do not charge broker fees on invoice finance. See whether factoring fees are tax deductible for the treatment of these costs in your accounts.
Invoice Factoring Costs FAQ
What is a typical invoice factoring rate in the UK?
Service fees typically run from 0.5% to 3% of turnover, and discount fees from 2% to 4% over the Bank of England base rate, which is 3.75% as at September 2026. All in, most facilities land between 1.5% and 3% of turnover per year. Smaller turnover means a higher percentage.
How much do factoring companies charge?
They charge in two parts. A service fee on your turnover, which covers credit control and administration, and a discount fee on the money you draw, which works like interest. A setup fee and various transaction charges may sit on top. The service fee is usually the larger of the two.
Is there a minimum monthly fee for factoring?
Most facilities have one. It is the single most overlooked figure in a quote, because in any month where your turnover falls short the minimum is what you pay regardless of the headline percentage. Always ask for it in pounds, not as a percentage.
Can factoring costs be negotiated?
Yes. Service fees, minimum terms and setup fees all move, particularly if you have a clean ledger, a good spread of customers and a competing offer in hand. Discount margins move less. Renewal is a natural negotiating point, as is any material growth in turnover since the facility started.
What is the cost of factoring formula?
There is no single formula, because the two charges are calculated on different bases. In practice: service fee equals turnover multiplied by the service rate, and discount fee equals the average drawn balance multiplied by the annual discount rate. Add them together and divide by turnover to get the total cost as a percentage of turnover, which is the figure worth comparing.
Is factoring more expensive than a business loan?
They are not directly comparable. A loan gives you a fixed sum repaid over a term. Factoring is a revolving facility that grows with your sales and never has to be repaid as such, because it clears as your customers pay. Measured purely on annual cost, factoring often looks more expensive than a secured loan and cheaper than unsecured short term borrowing.
Find Out The Costs Of Factoring For Your Business Today
Send us four numbers and we will price it properly
Your turnover, your payment terms, roughly how many invoices you raise a month and your largest customer as a share of the ledger. That is enough for us to come back with realistic pricing across our panel rather than a headline rate that changes at offer stage.
Would you benefit from an expert guiding you through the application process? We do not charge any broker fees on invoice finance.
Related reading
About the author
Marcus Wright is the owner and founder of Bolton Business Finance Ltd. He has worked in financial services since 2008, beginning his career at Santander, and spent time on the lender side at an independent invoice finance provider before becoming a commercial finance broker in March 2019.
He founded Bolton Business Finance in 2020 to give businesses access to the whole lending market rather than one bank’s own product range. The firm is a member of the National Association of Commercial Finance Brokers and works with a panel of 135+ lenders.
Call 0161 546 9128.
Bolton Business Finance Ltd is an independent commercial finance brokerage, not a lender. We are not authorised by the Financial Conduct Authority and can only complete non-regulated introductions. All lending is for business purposes only. Figures on this page are illustrative, describe general market practice as at September 2026 and are not a quote. The Bank of England base rate referenced is 3.75%, held on 17 September 2026. Service fees, discount margins, advance rates and eligibility vary between lenders and every application is assessed on its own merits. Registered address: Westgate House, 1 Westgate Avenue, Bolton, Greater Manchester, BL1 4RF. Company number 12495909.