Invoice factoring costs almost always come as two separate charges rather than one headline percentage: a service fee taken off your turnover, and a discount rate charged daily on whatever cash you’ve actually drawn down. Most UK businesses pay a service fee of around 0.5% to 3% of invoice value, plus a discount rate of 1.5% to 4.5% over the Bank of England base rate (currently 3.75%, held on 30 July 2026). On top of that sit arrangement fees, audit charges and minimum contract terms that rarely appear in a provider’s headline pricing. This guide breaks the whole stack down and works through a real example so you can see what your actual annual rate looks like, not just the percentage on the sales page.
The real cost stack behind invoice factoring costs
Providers rarely quote one number because factoring genuinely has two separate cost drivers, and mixing them up is the single biggest reason business owners misjudge what they’ll actually pay.
Service fee: a percentage of turnover
The service fee (sometimes called the factoring fee or administration fee) covers ledger management, credit control and collecting payment from your customers on your behalf. It’s charged as a percentage of the gross value of every invoice you factor, whether or not you’ve drawn any cash against it.
Typical ranges sit between 0.5% and 3.5% of turnover, according to figures from ExpertSure and MerchantSavvy. Where you land in that range depends on your sector, invoice volume and how much collections work the factor has to do. Transport and haulage businesses with straightforward, large-corporate debtors often pay towards the bottom of the range, around 0.75% to 1.5%, while export factoring with cross-border collection risk can run to 3% or more.
Discount rate: interest on funds drawn
This is the part people confuse with the service fee, and it’s the one that behaves like a loan. The discount rate is charged daily, only on the money you’ve actually drawn against your invoices, for the number of days you hold it.
Rates are usually quoted as a margin above the Bank of England base rate. Well-established, lower-risk businesses tend to see margins of 2% to 3.5% over base, while smaller or higher-risk firms can face 4% to 6% over base, according to MerchantSavvy’s July 2026 guide. With base rate at 3.75%, that puts most quotes somewhere between roughly 5.75% and 9.75% a year, though it accrues daily on your outstanding balance rather than as a flat annual charge.
Arrangement and audit fees
Arrangement fees are one-off charges to set up the facility, covering legal work, credit checks on your debtor book and document preparation. These typically run at 1% to 2% of the total facility limit, so on a £300,000 facility you might see £3,000 to £6,000 upfront.
Audit fees are separate and recurring. Most factors carry out periodic sales ledger audits, often quarterly or twice a year, to confirm the invoices you’re factoring are genuine and undisputed. Budget £250 to £750 per audit unless your provider has waived them as part of the deal. Some contracts also carry a minimum service fee, charged if your factored turnover falls below an agreed threshold in any month, so a quiet month can still cost you the same as a busy one.
Minimum terms and how hard it is to exit
Factoring agreements aren’t usually rolling month to month. Most carry a minimum term, commonly 12 months, and a notice period of 30 to 90 days to wind the facility down once you decide to leave, according to guidance from Sprintlaw and industry sources covering factoring contracts.
Once you’ve given notice, you typically can’t submit new invoices, so timing matters if you’re planning to switch providers or come off factoring altogether. Some agreements also carry early-termination or close-out fees if you leave before the minimum term ends, and these rarely show up in the headline pricing you’re quoted at the start. Read the termination clause before you sign, not after you want to leave.
Concentration limits and how they cut your available funding
A concentration limit caps how much of your funding can come from a single customer, and it’s one of the most common reasons a business gets less cash than it expects from a factoring facility. If your concentration limit is 30% and your total ledger is £200,000, the factor will only advance funds against £60,000 of invoices from any one debtor, no matter how creditworthy that customer is.
High-street bank-owned providers often apply a standard 20% to 30% limit across the board. If one client makes up a large share of your revenue, which is common for smaller subcontractors or agencies with a handful of key accounts, this can leave a meaningful chunk of your ledger unfunded. Some independent and fintech providers offer higher or more flexible limits, so it’s worth asking specifically about your biggest customer’s share before you commit to a facility.
Invoice factoring fees UK: recourse vs non-recourse
This is the choice that decides who carries the risk if a customer simply doesn’t pay.
Recourse factoring is cheaper, and it’s the default most providers quote first. If your customer fails to pay the invoice, usually after a set period like 90 days, you have to buy it back or repay the advance yourself. The lower service fee reflects the fact that the factor isn’t taking on bad debt risk.
Non-recourse factoring costs more, typically an extra 0.5% to 1% on the service fee, because the factor absorbs the loss if a customer becomes insolvent or simply can’t pay, usually backed by credit insurance behind the scenes. It’s worth the extra cost if your customer base includes anyone whose ability to pay you’re genuinely unsure about, but it won’t cover disputes over the quality of goods or services, only genuine non-payment.
Don’t assume non-recourse means zero risk. Providers still exclude cover for invoices that are disputed, for goods not delivered as agreed, or for debtors who were already in financial difficulty when you took them on, so read the exclusions carefully.
Factoring vs invoice discounting: which costs less?
The two products solve the same cash flow problem in different ways, and the cost gap between them comes down to who does the collections work.
Invoice factoring hands your credit control and collections to the provider. They chase your customers directly, usually under their own name (disclosed factoring), which is why the service fee sits higher, often 0.5% to 3.5% of turnover.
Invoice discounting (also called confidential invoice discounting) keeps collections in-house. You still chase your own customers, and most agreements are confidential, so your customers never know the facility exists. Because you’re doing the admin, the service fee is usually lower, sometimes as little as 0.1% to 1% of turnover, though discount rates on the funds drawn are broadly similar to factoring.
The practical trade-off: factoring suits businesses that want the credit control taken off their plate, or that don’t have the internal resource to chase payment properly. Invoice discounting suits established businesses with a solid finance team already handling collections, where paying extra for someone else to do it doesn’t make sense.
Worked example: turning headline percentages into an effective annual rate
Here’s where the real cost becomes clear, because a low-looking headline percentage on turnover can translate into a much higher rate once you measure it against the money you’re actually borrowing.
Assumptions: £500,000 annual turnover, invoices factored monthly, 85% advance rate, 45-day average customer payment term, 1.5% service fee, discount rate at 3% over base (6.75% a year, since base rate is 3.75%).
- Service fee: 1.5% × £500,000 = £7,500 a year, charged regardless of how long invoices take to pay.
- Average funds drawn: with an 85% advance rate and 45-day payment terms, your average outstanding balance across the year works out to roughly £52,400 (85% of turnover, prorated for the 45-day cycle).
- Discount charge: 6.75% applied to that average balance comes to roughly £3,540 a year.
- Total ongoing annual cost: £7,500 + £3,540 = £11,040, which looks like a modest 2.2% of your £500,000 turnover.
But turnover isn’t what you’ve actually borrowed. Measured against the £52,400 you typically have drawn down at any one time, that same £11,040 works out to an effective annual rate of just over 21%. Add a one-off arrangement fee of, say, £4,000 in year one, and the first-year effective rate climbs to around 29%.
That gap between “2.2% of turnover” and “21% of funds actually borrowed” is the single most important number in this whole article, because it’s the one that gets left out of most sales conversations.
Is invoice factoring worth it?
It depends on what you’re comparing it against, and what problem you’re actually trying to solve.
Factoring makes sense if slow-paying customers are genuinely constraining your growth, if you don’t have spare capacity for credit control, and if the effective rate (usually somewhere in the high teens to low thirties as a percentage, as shown above) is still cheaper than the alternative of turning down orders or missing supplier payments. It’s also often faster to arrange than a traditional business loan, with fewer requirements around trading history.
And it’s less likely to be worth it if your margins are already tight, since a 20%+ effective rate on the cash you draw can eat a serious chunk of profit on low-margin work. It’s also a weaker fit if just one or two customers dominate your ledger, since concentration limits may leave much of that value unfunded anyway. Run the actual numbers for your own turnover and payment terms using the method above before deciding either way.
FAQs
How much does invoice factoring cost in the UK?
Most UK businesses pay a service fee of 0.5% to 3.5% of turnover plus a discount rate of 1.5% to 4.5% over the Bank of England base rate (3.75% as of 30 July 2026). Combined, this typically works out to an effective annual rate in the high teens to low thirties once measured against the cash you actually draw down, rather than your total turnover.
What’s the difference between the service fee and the discount rate?
The service fee covers admin, credit control and collections, and is charged as a percentage of your total invoiced turnover. The discount rate is interest charged daily, only on the cash you’ve drawn against your invoices, for the number of days you hold it, similar to how an overdraft works.
Is invoice factoring more expensive than invoice discounting?
Usually yes, because factoring includes the provider chasing payment on your behalf, which pushes the service fee higher, often 0.5% to 3.5% of turnover compared with 0.1% to 1% for discounting. Discount rates on drawn funds are broadly similar between the two products.
What’s a concentration limit and why does it matter?
It’s a cap on how much funding a factor will advance against invoices from a single customer, commonly 20% to 30% of your total ledger. If one client makes up a large share of your revenue, a concentration limit can leave a significant portion of that value unfunded.
What’s the difference between recourse and non-recourse factoring?
With recourse factoring, you have to repay the advance if your customer doesn’t pay, usually after a set period like 90 days. With non-recourse factoring, the provider absorbs genuine non-payment losses, typically for an extra 0.5% to 1% on the service fee, though disputes and pre-existing debtor problems are usually still excluded.
Are there hidden fees in invoice factoring contracts?
Yes, commonly arrangement fees (1% to 2% of the facility limit), audit fees (£250 to £750 per audit), minimum service fee charges if turnover dips, and early-termination fees if you exit before the minimum contract term. Always ask for the full fee schedule, not just the headline service fee and discount rate.
How long am I locked into an invoice factoring contract?
Most agreements carry a minimum term, commonly around 12 months, plus a notice period of 30 to 90 days to exit. Some providers now offer shorter or rolling contracts, so it’s worth comparing terms as carefully as the fees themselves.
Is invoice factoring worth it for a small business?
It can be, particularly if slow payment is genuinely limiting your growth and you lack the resource for in-house credit control. Whether it’s worth it financially depends on your margins and the effective annual rate you calculate for your own turnover and payment terms, not just the headline percentage a provider quotes.
