Most provider websites describe factoring costs as "from 0.5%" and leave it there. The real answer has two main parts, several smaller ones, and a minimum fee that can matter more than any of them. This guide sets out each charge, the ranges published across the UK market, and how to add them up into the only figure that matters: the total annual cost of the facility.
About the figures: all ranges on this page are published market ranges, not an offer. Fees and eligibility vary by provider, turnover, sector and the quality of your customers.
The two main charges: service fee and discount charge
Almost every factoring facility is priced with a service fee for running the facility and a discount charge for the money advanced. They are calculated on different bases, which is why a headline rate never tells you the cost.
Service fee
The service fee (also called the management or administration fee) pays for the provider's work: verifying invoices, running your sales ledger, credit control and collections. Published ranges are roughly 0.75%–3% for factoring and 0.2%–1% for invoice discounting, where the business keeps credit control itself.
It is quoted in one of two ways:
- Per invoice: a percentage of the face value of each invoice submitted. Common on selective and spot facilities.
- Per turnover: a percentage of gross annual invoiced sales, collected as invoices are assigned. Common on whole-ledger facilities. The effect per invoice is the same.
Minimum fees
Most whole-ledger facilities carry a minimum service fee, set against the turnover you projected at the outset. If a provider quotes 1.5% on £800,000 projected turnover, the minimum might be £12,000 a year. Factor only £400,000 and you still pay £12,000, a real service fee of 3%. Always ask what the minimum is and whether it is pro-rated in year one.
Discount charge
The discount charge is the cost of the money itself. It works like overdraft interest: a margin over a reference rate (Bank of England base rate or SONIA), calculated daily on the funds you have drawn and charged only for the days they are outstanding. Published margins sit roughly 1.5%–5% a year above the reference rate.
Daily discount charge formula: funds in use × (base rate + margin) ÷ 365 × number of days outstanding.
Worked through: you draw £50,000, base rate is 4% and your margin is 2.5%, so the annual rate is 6.5%. If the customers pay after 30 days the charge is £50,000 × 0.065 ÷ 365 × 30 = £267.12; at 60 days it doubles to £534.25. Slow-paying customers therefore cost more to factor than the service fee alone suggests.
Two details to check: whether the provider applies a minimum base rate (a floor below which the reference rate will not fall), and whether the charge is calculated on funds in use or on gross invoice value. The first is common; the second is unusual and expensive.
The other fees you may be charged
The smaller charges are where facilities differ most. Not every provider levies all of them, but every one should be set out in the quotation.
| Charge | What it is for | Typical range or basis |
|---|---|---|
| Arrangement (set-up) fee | Documentation, legal charge over the book debts, opening the facility. | Often 0.5%–1% of the facility limit, paid once at the start. |
| Audit or survey fee | The provider's periodic review of your sales ledger, systems and records, usually on site or by video. | Fixed fee per visit; typically once or twice a year. |
| Refactoring fee | Charged when an invoice passes the recourse period (often 90–120 days past due) and is handed back to you. | Commonly a percentage of the invoice value, charged on top of the reversed advance. |
| Termination fee | Payable if you end the facility before the minimum term or without giving full notice. | Often a multiple of the monthly minimum fee or a percentage of the facility limit. |
| Bad debt protection premium | Optional cover for approved customers who become insolvent, on a non-recourse facility. | Often 0.5%–1% of insured turnover. |
| CHAPS / same-day payment fee | Charged for each same-day transfer of funds to your account instead of a standard (BACS or Faster Payments) transfer. | A fixed fee per payment. |
| Disbursements | Costs the provider passes on: credit reports on new customers, legal fees, debt recovery action, credit limit application fees. | At cost, or at a published tariff. |
Refactoring and termination fees deserve the most attention. The first turns a slow-paying customer into a direct cost (see what happens if a customer does not pay); the second sets what it costs to leave.
Worked example 1: a single £25,000 invoice paid at 45 days
One invoice from assignment to settlement on a facility with an 85% advance rate, a 1.5% service fee and a 3% margin over a 4% base rate (7% a year).
Illustrative example One invoice, start to finish
- Invoice value
- £25,000.00
- Initial advance (85%)
- £21,250.00
- Amount retained by the provider
- £3,750.00
- Service fee (1.5% of invoice value)
- £375.00
- Discount charge (£21,250 × 7% ÷ 365 × 45 days)
- £183.39
- Total charges
- £558.39
- Balance released when the customer pays on day 45
- £3,191.61
- Total proceeds (advance + balance)
- £24,441.61
- Cost as a share of the invoice
- 2.23%
Figures are illustrative estimates only and do not represent a finance offer.
Had the customer paid at 30 days the discount charge would have been £122.26; at 90 days, £366.78. The service fee does not change with time, so it dominates for fast payers and the discount charge catches up for slow ones. Test your own figures in the invoice factoring calculator.
Worked example 2: annual cost for a £1.2m-turnover business
A business with £1,200,000 of annual sales and 50 debtor days has an average ledger of about £164,400 (£1.2m × 50 ÷ 365) and, at an 85% advance rate, around £139,700 drawn at any time. The facility is priced at a 1.25% service fee with a £15,000 annual minimum, a 3% margin over a 4% base rate, a 0.75% arrangement fee on a £175,000 limit, one audit a year and a dozen CHAPS payments.
Illustrative example Year-one cost, £1.2m turnover
- Service fee (1.25% of £1,200,000; equals the £15,000 minimum)
- £15,000.00
- Discount charge (7% a year on about £139,700 average funds in use)
- £9,781.00
- Arrangement fee (0.75% of £175,000 limit)
- £1,312.50
- Audit fee (one visit)
- £750.00
- CHAPS fees (12 × £25)
- £300.00
- Estimated total cost, year one
- £27,143.50
- As a share of turnover
- 2.26%
- As an effective annual rate on funds drawn
- About 19%
Figures are illustrative estimates only and do not represent a finance offer.
In year two the arrangement fee drops away and the cost falls to around £25,800, or 2.15% of turnover. If sales dipped to £900,000, the £15,000 minimum would still apply and the effective service fee would rise to 1.67%. That sensitivity is why our small business guide treats the minimum fee as the first question to ask.
How to compare factoring quotes
Providers quote in different formats, so headline rates are rarely comparable. Convert every quotation into a projected annual cost using your own turnover and debtor days, then compare the totals.
Work out your funds in use
Annual turnover × average debtor days ÷ 365 gives your average ledger; multiply by the advance rate to get the average funds drawn. Use the same figure for every quote.
Apply each quote's service fee
Take the greater of the percentage on your turnover and the minimum fee. If a provider quotes per invoice, multiply by your typical number and size of invoices.
Apply each quote's discount rate
Funds in use × (reference rate + margin), using the same base rate assumption throughout. Check for a minimum base rate floor.
Add the one-off and incidental fees
Arrangement, audit, CHAPS and any monthly administration charges. Include the first year's arrangement fee separately so you can see the ongoing cost too.
Facilities quoted at "1% and base plus 2.5%" and "1.75% and base plus 1.5%" can come out close together or thousands apart, depending on your debtor days. A business paid in 30 days should favour the lower service fee; one waiting 75 days, the lower margin.
Questions to ask before you sign
- What is the minimum service fee, and is it pro-rated in year one?
- Is the discount charge calculated on funds in use or on invoice value, and is there a base rate floor?
- What is the recourse period, and what is the refactoring fee when it expires?
- What is the minimum term, the notice period and the termination fee?
- Which disbursements are passed on, and at what tariff?
- Does the advance rate drop for certain customers, for export debtors or for invoices over a certain age?
- If the quote came through a broker, how is the broker paid, and does that affect the rate?
Want to see what a facility might cost for your business?
Tell us your turnover, sector and debtor days and we will explain which charges to expect and which to challenge.
Frequently asked questions
What is a typical invoice factoring rate in the UK?
Published market ranges put the service fee at roughly 0.75% to 3% of turnover for factoring and 0.2% to 1% for invoice discounting, plus a discount charge of roughly 1.5% to 5% a year over Bank of England base rate on funds drawn. Where a business lands within those ranges depends on turnover, sector, customer quality and the provider.
Is the discount charge the same as interest?
In effect, yes. The discount charge is calculated daily on the funds you have drawn, at a margin over a reference rate such as Bank of England base rate or SONIA, and is charged only for the days the money is outstanding. Providers avoid the word interest because factoring is legally a purchase of invoices rather than a loan.
Why does my quote include a minimum fee?
A minimum fee guarantees the provider a floor level of income regardless of how much you invoice. It is usually set as a monthly or annual amount based on your projected turnover. If your sales fall short of the projection, you still pay the minimum, which is why it matters most to small or seasonal businesses.
Are invoice factoring fees subject to VAT?
Service fees and most administration charges normally carry VAT at the standard rate, which a VAT-registered business can usually reclaim. The discount charge is generally treated as an exempt finance charge. Check the VAT treatment on each line of your quotation.
Can factoring fees be negotiated?
Often, yes. Service fee, discount margin, minimum fee and arrangement fee are all commonly negotiated, particularly where a business has good-quality customers or more than one quotation. Termination fees and notice periods are also worth challenging before you sign.