Table of Contents
- How It Works
- Using the Invoice Financing Calculator
- How Lenders Determine Terms
- Advantages of Invoice Financing
- Other Invoice Financing Considerations
- Final Thoughts
Invoice Financing Calculator - Find Out How Much It May Cost
If you need to increase your cash flow, invoice financing — sometimes called invoice factoring or invoice discounting (though the terms are not interchangeable) — may be the solution to your cash flow crunch.
To keep your business running, you need capital. But bank financing isn’t always an option, and finding out how much an advance will cost you can be challenging without the right tools, like an invoice financing calculator.
As a small business owner who works primarily on a credit basis with your customers, you’re likely no stranger to lean times. Though you may have finalized a lucrative project, your bank account will not reflect the fruits of your labor until your customer pays. And depending upon your terms, this could take as long as 90 days. While you wait, you still have to meet payroll, pay suppliers and cover other critical expenses.
Here’s how invoice financing can help:
- You select invoices you wish to finance.
- Your lender will issue you a percentage of the invoices, known as an advance.
- The lender deducts a fee known as a factor (or discount rate) each week until the invoices are paid in full.
- Once the invoices are paid, the lender issues you the reserved balance, minus the fees.
With instant access to the cash you’re owed, you can bridge temporary cash flow gaps or act on a time-sensitive business opportunity. But how much will invoice financing cost you? To find out, plug the numbers into our invoice discounting cost calculator.
Invoice Financing Calculator Terms to Know
Before you run the numbers in the accounts receivables financing calculator, let’s review some terms that you’ll come across and should understand.
On an invoice financing calculator, the advance rate refers to the percentage of the invoice value a lender will pay your business at the time your receivables are financed. The amount of the advance depends on many factors, including your industry, the size of your transaction and other risk parameters. But in general, you can expect to receive 70% to 90% of your accounts receivable face value.
Invoice Factoring Fee
We’re all familiar with interest and how it’s calculated: To borrow money, you need to repay what you borrow. And to compensate the lender for the risk of lending to you, you need to repay more than you borrowed. How much you pay in interest depends on your rate, the amount of the loan and how long it takes you to pay off the loan. Interest accrues on the principal amount, which gets smaller as more payments are made. And it is in this respect that factor rates differ.
Factor rates are calculated only once using the original loan amount. In accounts receivables financing, factor fees begin accruing the day the invoice is financed and are deducted from the reserve when the balance is paid. You will need to know your factor rate in order to estimate your payments using our online invoice financing calculator.
Once your customer pays the invoice, your lender rebates you the reserve, less any fees.
Estimate Your Cost With the Invoice Financing Calculator
Now that we’ve provided background for the invoice financing calculator, you’re ready to estimate your costs.
Step 1: Enter the total value of the invoice you plan to finance.
Step 2: Enter the estimated factoring fee. These rates typically fall within the 1% to 3% range.
Step 3: Select the net terms of the given invoice in weeks. If you’re working with a late-paying customer that you know particularly well, adjust the term accordingly.
Step 4: Select the estimated advance rate percentage.
Step 5: Calculate. The accounts receivable financing calculator will output the total advance, reserve and the cost of financing. We encourage you to experiment with different terms. This way, you fully understand what the potential cost of funding may be — whether your customer pays their invoice in 30 or 120 days.
Invoice Financing Calculator Example
Let’s review an example of how we’d use an invoice financing calculator to see how these components work together in an invoice financing transaction.
Nick’s Roofing Company receives an 85% advance for an invoice totaling $20,000.
Invoice Amount: $20,000
Advance Amount: $17,000 (calculated as follows: $20,000 X 85%)
Reserve Amount: $3,000 (calculated as follows: $20,000 – $17,000)
The lender charges a weekly factor fee of 1% of the total receivable value until the invoice is paid in full. Entering this information into the accounts receivable financing calculator, we get the following:
Invoice Factoring Fee: $200/week (calculated as follows: $20,000 X 1%)
It takes Nick’s Roofing’s customer a total of 12 weeks to pay the invoice.
Cost of Financing: $2,400 (calculated as follows: $200 X 12)
Rebate Owed to Nick’s Roofing: $600 (calculated as follows: $3,000 – $2,400)
How Lenders Determine Your Advance and Factor Rates
Now that we’ve covered the basics of invoice financing and how a receivables financing calculator works, let’s examine how a lender determines the advance and factor rates for small business owners.
Unlike other short-term funding options, the creditworthiness of your business is less of a deciding factor. What’s essential in invoice financing and receivables factoring is the creditworthiness of your customers. As a result, you can expect invoice financing companies to perform a thorough examination of your customer’s payment history with your business, a business credit check and reputation analysis.
While there are fewer minimum requirements, the health of your business is still relevant and will influence your offered advance and factoring rates. For example, a lender will consider:
- Your company’s average collection period (days outstanding): As a general rule, the less time it takes to collect on customer invoices, the lower the risk of default and the lower the factor fee and higher the advance rate your business may qualify for.
- The diversity of your customer portfolio: The more customers you have and the more evenly your sales are distributed among them, the lower the overall risk. Companies with a diverse portfolio of clients tend to get better factoring and advance rates than those with a more concentrated portfolio of just a few clients.
- Your company’s sales volume: The number of accounts receivable you plan to finance every week will affect your factor and advance rates. Typically, the more invoices you plan to finance, the lower your factor rate and the higher your advance rate.
Advantages of Invoice Financing
The primary benefit of invoice financing is the speed of funding. Instead of waiting 30, 60, even 90 days to be paid by your customers, you can use that capital to fund your business operations and meet upcoming expenses, like taxes or payroll.
Another significant advantage is that accounts receivable financing gives your business a way to solve its cash flow issues without taking on debt or liabilities, as you’re leveraging money that’s already owed to you.
What’s more, you don’t need a strong credit score or extensive business history to qualify. Approval, advance and factor rates are primarily based on the credit of your customers, not your business. So if you’ve been turned down by lenders for other loan types, this may be the financing solution you need.
Beyond the Calculations: Other Invoice Financing Considerations
Like any financing product, terms vary. So it’s important to pay close attention to the fine print when you’re getting ready to use the invoice financing calculator online to estimate your payments. Be sure to account for additional lender fees, and look for conditions that will impact the nature of your agreement.
For example, certain lenders tack additional fees onto their agreements. It’s important to account for these charges when using the receivables financing calculator as they will drive up the total cost of capital. Common invoice financing expenses include:
- Application and origination fees
- Servicing fees
- ACH and bank wire fees
Another consideration is collection control. Some lenders will insist on managing the collection process, putting the lender in direct contact with your customer. As this will impact your relationship with your customer, be clear on this condition before coming to terms on an invoice financing agreement.
How to Get Started with Invoice Financing
Estimating the total cost of factoring invoices can be challenging, whether you’re new to invoice financing or not. But by plugging your invoice amount, advance rate and term into our small business loan calculator, you’ll have a clearer understanding of what your final cost of factoring invoices may be.
If you have questions about whether invoice financing is right for you or need help understanding your invoice finance calculator results, talk to a Fast Capital 360 Business Advisor. They will be able to help you decipher and navigate the terms and will pair you with reputable lenders in the industry.