Invoice Financing Calculator
Calculate Your Total Cost of Financing
Table of Contents
- Invoice Financing Calculator - Find Out How Much It May Cost
- How It Works
- How Lenders Determine Terms
- Using the Invoice Financing Calculator
- Advantages of Invoice Financing
- Other Invoice Financing Considerations
- Final Thoughts
Invoice Financing Calculator - Find Out How Much It May Cost
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.
To keep your business running, you need capital. But bank financing isn’t always an option. Invoice Financing—sometimes called invoice factoring—may be the solution to your cash flow crunch.
Here’s how it works:
- 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 financing calculator.
How to Estimate the Cost of Financing with the Invoice Financing Calculator
If you are new to invoice financing, some terms may be foreign to you. Before you run the numbers in the accounts receivable financing calculator, let’s take the time to define these lesser-known attributes.
The advance rate is 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 percent of your accounts receivable face value.
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 as it 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.
Lenders withhold a small percentage of your accounts receivables until the invoice is paid in full. This percentage is known as the reserve. Once the invoice is paid, the reserve is rebated, less any fees.
Let’s review an example to see how these components work together in an invoice financing transaction.
Nick’s Roofing Company receives an 85 percent advance for an invoice totaling $20,000.
Invoice Amount: $20,000
Advance Amount: $17,000 ($20,000 X 85%)
Reserve Amount: $3,000 ($20,000 – $17,000)
The lender charges a monthly factor fee of 1.02 (2% of the total receivable value) until the invoice is paid in full.
Factoring Fee: $400/month ($20,000 X 2%)
It takes Nick’s Roofing’s customer a total of 90 days (3 months) to repay the invoice.
Cost of Financing: $1,200 ($400 X 3)
Rebate Owed to Nick’s Roofing: $1,800 ($3,000 – $1,200)
How Lenders Determine Your Advance and Factor Rates
Now that we covered the basics of invoice financing, 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 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 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 concentration rate of your portfolio of customers: The more customers you have and the more evenly your sales are distributed among them, the lower the customer concentration, and overall risk. Companies with low customer concentration tend to get better factoring and advance rates than those with high concentration.
- Your company’s sales volume: The number of accounts receivable you plan to factor every month 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.
Using the Invoice Financing Calculator to Estimate Your Advance, Reserve and Total Financing Cost
Now that we’ve provided background for the invoice factoring calculator, you’re ready to leverage the tool to its fullest advantage.
Step 1: Enter the total value of the invoice that you plan to finance.
Step 2: Enter the estimated factoring fee. These rates typically fall within the 1 to 3 percent 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 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.
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 accounts receivable financing gives your business a way to solve its cash flow issues without taking on debt or liabilities, as with a business loan. The invoices themselves act as collateral, and 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. 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 as they will drive up the total cost of capital. Common 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, talk to a Business Advisor. They will be able to help you decipher and navigate the terms and will pair you with reputable lenders in the industry. Ready to find out more? Call us at (800) 735-6107 or click here to speak directly with one of our dedicated advisors.