In this article, we discuss invoice financing rates and the factors that affect the cost of the solution. From this article, you will learn
- Typical administration fee rates
- Typical invoice financing rates
- Key elements that impact your rates
If you are not familiar with invoice finance, consider reading “How does invoice financing work?” before reading this article. If you want a quote, use this form.
1. Administration fee
Invoice finance lines typically charge a monthly administration fee for every open invoice. The fee is calculated as a percentage of the invoice, with rates between 0.45% and 1.35%.
This fee covers the cost of managing the line and is determined by the size and complexity of the facility. The following table provides an approximate range based on three example line sizes.
| Line Size | Administration Fee Rate |
|---|---|
| $50,000 | 1.15% |
| $200,000 | 0.80% |
| $500,000 | 0.50% |
2. Interest rates and advances
Invoice finance lines have a daily interest rate applied to the advanced amount of every invoice. The advance is the initial instalment of an invoice financing transaction and covers 70% – 85% of the invoice.
Most finance companies set your interest rate based on factors such as the size of your line, the risk associated with the transaction, and other relevant criteria. Typically, the company starts with a base interest rate, which is then adjusted up or down depending on the specific details of the transaction.
The base rate varies by finance company but usually combines a reference rate (e.g., BBSY), their cost of capital, and market conditions. The following table shows the rate details for three example line sizes.
| Line Size | Advance Rate | Base Rate | Add/Subtract | Financing Rate |
|---|---|---|---|---|
| $50,000 | 70% – 85% | 12.85% | 1.5% to 2% | 14.35% to 14.85% |
| $200,000 | 70% – 85% | 12.85% | -0.5% to 1.5% | 12.35% to 14.35% |
| $500,000 | 70% – 85% | 12.85% | -1.5% to 0% | 11.35% to 12.85% |
Note: Table can be scrolled left/right on mobile devices. Tap on screen if scrollbar does not appear.
3. What determines your general rates?
The two most important criteria that determine your rates are the line’s size and risk profile. Low-risk clients that finance high sales volumes usually get the lowest rates. On the other hand, higher-risk clients or clients with a low sales volume usually get higher rates.
a) How is volume determined?
Invoice finance is a volume-based business, not unlike the wholesale business. Clients that need larger financing lines (i.e., higher volumes) can get lower prices. Financing volume is the most important variable used in determining your rates.
However, finance companies also consider the size and number of invoices you have. Clients that need to process a high volume of low-value invoices may have higher-than-average costs. This is due to the work needed to process a high volume of low-value invoices.
b) Invoice size is important (an example)
For example, it’s easier for a finance company to manage a single $30,000 invoice than to finance thirty $1,000 invoices, each to a different customer. Both scenarios total the same amount – $30,000. However, processing thirty invoices takes more work than processing one large invoice.
While having small invoices affects your cost, it does so only to a certain extent. Let’s look at another example. Although financing ten $30,000 invoices is more work than financing a single $300,000 invoice, the rates would be similar. This is because the fees generated by each individual invoice are sufficient to cover their associated labour cost.
4. How is client risk determined?
Invoice finance companies evaluate risk differently. Some are more open to risk than others. However, they usually look at three criteria to determine client risk.
a) Your industry
Finance companies consider your industry when determining how to structure a proposal. Some industries are considered to have a lower risk. Consequently, they often get better terms. These industries include transport, labour hire, and mining services. Other industries, such as construction, have a higher risk, which affects your rates.
b) The credit quality of your clients
The credit quality of your business clients is very important. However, it does not play a large role in determining your financing rate. Instead, creditworthiness is used to decide whether or not an invoice from a customer will be financed. Your client’s creditworthiness also affects the size of your financing line and your advance percentage.
c) The stability of your business
Finance companies consider the stability of your business in their rate determination. Companies with a reasonably long and stable history are considered safe. Consequently, they often get lower rates. New companies, or companies with unsteady sales, are considered riskier. Accordingly, they often get slightly higher rates.
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Note: Rate and cost information are provided for information and educational purposes only. The rates your company gets may vary and depend on several criteria.