Invoice Financing Calculator:
Know How Much Your Financing Costs
Key Takeaways
Invoice financing can be expensive. The invoice financing calculator will give you an estimate of the cost so you can determine whether it's a feasible solution for your business.
The most common terms you'll likely encounter when dealing with invoice financing calculators include the advance rate, factor rate/fee, reserve amount, and payment term.
Lenders often look at different factors when determining your rates. These factors include your customers' creditworthiness, net invoice term, diversity of your customer portfolio, invoice volume, and business industry.
In addition to the factor fee, the invoice financing company may charge additional fees for application, origination, check processing, and late payments.
Cash flow gaps due to unpaid customer invoices can sometimes be why many businesses fail to achieve growth. When most of their working capital is tied up in accounts receivables, it can be difficult to meet operating expenses or take advantage of a business opportunity. If left unresolved, these cash flow gaps could lead to a more serious consequence (i.e., business closure).
Fortunately, invoice financing is available for businesses dealing with cash flow issues because of unpaid customer invoices. Invoice financing allows you to borrow money against your customers' accounts receivables. Once approved, you can finance up to 95% of your invoices' value. You won't have to deal with the usual wait for invoice payments and can address your business' financial obligations on time.
But before you apply for one, it's crucial to know how much the factoring costs. This is where an invoice financing calculator comes in handy.
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What is an Invoice Financing Calculator?
An invoice financing or invoice factoring calculator helps businesses estimate the potential costs of invoice financing in seconds. You enter the numbers, and the computer does the calculations for you.
Calculating the loan cost can come in handy if you compare loan offers of the same type from different lenders or factoring companies. As a business owner, you'll want to pick the option that will cost you less, resulting in more significant savings for your company.
Of course, there are other factors to consider, such as the lender's reputation and customer service. However, the financing cost will ultimately be the number one consideration when deciding which loan offer to take.
Invoice Financing Terms to Familiarize
If this is your first time applying for invoice financing, you may get confused by the terms your lender or factoring company uses to explain the financing cost. It would be helpful to understand what the terms mean first so you'll know what you'll be paying for.
We've gone ahead and laid out the terms used to describe the cost below:
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1. Advance rate
The advance rate refers to the percentage of your invoices' value that the lender will extend if they approve your application. The equivalent amount of this percentage will be the funding amount.
The advance rate could range from 80% to 95% of the total value of the invoices you submit for financing. The final calculation will depend on several factors, such as your business industry, total invoice amount, invoice volume, and more.
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2. Factor Fee
The factor rate, also called a factor fee or a factoring fee, is the amount you'll pay for the invoice financing service. It's like an interest rate, but the difference is that interest rates accrue on the principal amount, and the amount you pay in interest will be reduced as you pay off your loan. Factor fees, on the other hand, are calculated based on the original amount. That said, your repayments will stay the same throughout the loan period.
Factor rates essentially compensate the lender for taking on the risk of letting you borrow money. Lenders usually express them as a percentage or in decimal form. They usually charge around 1% to 4.5%. If the lender uses decimal form in calculating the cost, the factor fee could range from 1.0 to 1.35 of the total invoice value financed.
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3. Reserve Amount
As mentioned, the lender will advance you anywhere from 80% to 95% of the total value of your invoices. The invoice financing company will hold the remaining 5% to 20% until your customers pay their invoices. This is called the reserve amount. Once your customer settles their invoices, the reserve amount will be wired back to you (minus the additional financing fees).
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4. Payment Term
The payment term refers to the net terms of your outstanding invoices. It could be 30, 60, or 90 days (or more in some cases). You can choose a daily or weekly payment structure depending on what you and the lender have agreed upon approval.
How to Use Invoice Financing Calculators
While it's entirely possible to compute the costs by hand, the factoring process can be complicated, especially if you're unfamiliar with the factors that go into the calculation. With the invoice finance calculator, all you have to do is enter the figures, and it will automatically give you the results within seconds.
Here's a breakdown of the steps in using the calculator:
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Step 1.
Decide on the amount you need and put that into the calculator.
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Step 2.
Next, estimate the factor fee. Lenders may charge a factor fee of 1% to 4.5% or 1 to 1.35 of the total value of the invoices. To get a rough estimation, try to evaluate your qualifications. Factors like your customer's creditworthiness, payment term, customer portfolio diversity, invoice volume, and others will play a role in how lenders determine your factor rate (discussed later).
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Step 3.
After entering your factor fee, enter your usual net payment terms. Invoice financing companies usually require invoices to have a payment term of at least 30 days or longer.
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Step 4.
Decide on the frequency of your repayments. Some lenders may require daily payments, while others may allow weekly payments.
Once you've entered the factors, the calculator will show you the computations. You will see how much you'll pay each day or week (depending on your chosen frequency) and the reserve amount
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Example of Using Invoice Financing Calculator
Let's look at a simple example to better understand how invoice financing works.
Say that you have $10,000 worth of capital tied up in your customers' invoices, and you won't get paid until 90 days later. However, your employees' payroll will be due by the following week, and you have to pay your rent and electricity. Without cash on hand, you won't be able to afford these expenses, with most of your capital tied up to your unpaid customer invoices. To avoid cash flow issues and late payments, you decide to apply for invoice financing.
The lender then offers you an advance rate of 85% at a factor fee of 1% each week the invoice remains outstanding. Using the invoice factoring calculator, we will get:
Advance amount: $8,500 ($10,000 x 0.85)
Reserve amount: $1,500 will be returned to the business once the customers settle their accounts. However, the lenders will still deduct the factor rate and other fees from your reserve amount.
Invoice factor rate/fee: $100/week ($10,000 x 0.01) x 12 = $1,200 at the end of the 90-day net term.
In that case, the reserve amount will be down to $300. Depending on the lender, they may also charge other fees (discussed later), further lowering the remaining amount returned to the business.
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How Lenders Determine Your Rates
As mentioned in the previous section, the invoice factoring rates you'll qualify for depend on several factors. If you want to estimate how much rate the lender would offer, looking at these factors will help. Moreover, understanding how rates are determined will help you work on your qualifications, so you'll have better chances of qualifying for invoice factoring with excellent terms.
That said, here are the factors that will contribute to how the lenders calculate your rates:
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1. Customer's Creditworthiness
Unlike other funding options, your business' creditworthiness won't be the primary deciding factor. Since the repayments will depend on your customer's repayment capabilities, the lenders will consider your customers' creditworthiness when deciding on your eligibility.
That said, once you apply for invoice factoring, the company will conduct a thorough background and credit check on your customers. The more creditworthy they are, the better your chances of qualifying for excellent financing terms. Conversely, if your customers show a history of missed payments or payment defaults, you can expect the rates to lean on the higher side.
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2. Invoice Net Term
In general, the shorter the net terms, the more likely customers are to settle their balances. With a lower risk of default, invoice factoring companies will be more inclined to offer lower factor rates and higher advance rates.
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3. Diversity of Customer Portfolio
Lenders prefer lending to businesses with a diverse customer portfolio, especially if their sales are evenly distributed among them. They're more likely to qualify for invoice financing with better factoring fees and advance rates than businesses with concentrated customer portfolios.
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4. Invoice Volume
Businesses that process high-volume unpaid invoices may fare better regarding invoice financing. The higher the volume, the better their chances of getting lower factor rates and higher advance rates.
However, other financing companies may also offer excellent rates to businesses that finance fewer, but high-value outstanding invoices. This applies to invoice financing companies that insist on taking responsibility for collecting customer payments. That way, they won't have to handle a lot of customers and exert as much effort when collecting payments.
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5. Business Industry
As a business owner, you know that some industries are riskier than others. Businesses such as restaurants, construction, agriculture, and other service-based companies are considered high-risk and are less likely to qualify for better rates. Low-risk industries include product-based businesses such as wholesale and retail businesses, which typically have better chances of getting lower factor rates and higher advance rates.
However, that does not mean that high-risk industries can't qualify for better invoice factoring terms. Many lenders that offer invoice factoring specialize in lending to high-risk businesses like the ones mentioned above. These lenders may offer high-risk borrowers lower factor rates and higher advance rates.
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Other Invoice Financing Fees to Consider
Lenders may charge additional fees in addition to the factor fee, which the invoice calculator doesn't include in the calculation. Therefore, it's important to know these fees to understand the total cost. Although lenders may have different invoice financing products with varying fees, you can generally expect to be charged for the following:
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1. Application Fees
Lenders usually incur charges when they perform a background check on your business, including your clients. While some lenders may forego this, others may pass the fees on to the borrowers. The application fee is then added to the total cost of the financing.
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2. Origination Fees
Lenders may also charge an origination fee to cover the processing of the new invoice factoring application, loan underwriting, and funding. Borrowers usually pay this fee upfront during the loan application process, which usually costs around 0.5% to 1% of the total funding amount.
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3. Check Processing Fees
Check processing fees are basically the service charge associated with clearing a check from a bank. If a business prefers paying through checks, the lenders may pass on these charges to them.
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4. Late payment fees
Once the invoice's net terms are up and the customers still haven't paid their invoices, the invoice financing company may also charge a late payment fee. Depending on the payment structure or schedule, they may charge a certain percentage for every week the invoice remains outstanding.
Final Thoughts
Invoice financing can be an excellent financial resource if you're in a cash crunch due to unpaid customer invoices. However, as with any business loan, calculating your costs is crucial before moving forward with your application. Invoice factoring calculators offer an easy way to do that.
We recommend experimenting with different scenarios (i.e., different factor rates, advance amounts, etc.) and calculating the costs using the calculator. This way, you'll get a bigger picture of the potential costs and determine how it will affect your company's bottom line.
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Common Questions. Straight Answers.
As mentioned, invoice financing lets you free up the cash tied up in your customers’ unpaid receivables. In a way, it’s an advance on your business’ outstanding invoices, so you’ll have the cash flow you need to pay your staff, reorder inventory, and address your operating and overhead costs without having to wait for weeks for your customers to pay you.
Once approved, the lenders will advance the agreed-upon amount (80% to 95% of your invoices’ value), and you can start using the funds immediately. After your customers settle their invoices, you’ll have to pay the financing company back with the advanced amount plus the fees.
Note: Some lenders may insist on taking responsibility for the invoice’s payment chasing and collection. As such, they will be in direct contact with your customers, and your customers, in turn, will know that you’re using invoice financing, which can ultimately affect your relationship with your customers. Always be clear about the collection process before signing the deal with the invoice financing company.