Calculate cost of invoice discounting (invoice financing). This tool helps you calculate, understand, and optimize this metric for your business.
A 3% fee looks small until you annualise it over the 45 days you are actually borrowing for, which works out at about 24% a year. That can still be worth paying to keep trading, but compare it against an overdraft or a Sacco facility before treating it as cheap.
Invoice discounting advances part of an unpaid invoice for a fee. The fee looks small as a percentage of the invoice, because it is charged once rather than annually.
Annualising it over the days you are actually borrowing for is the only way to compare it against an overdraft, a bank facility or a Sacco loan. This calculator does that conversion.
When the cash keeps you trading, lets you take a supplier discount larger than the fee, or lets you fulfil an order you would otherwise lose. In those cases an expensive facility can still be the right call.
When it becomes a permanent way to fund normal operations, the cost compounds and the underlying problem is usually payment terms rather than financing.
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