Every finance provider quotes a rate, but the rate is rarely the real cost. Two facilities advertised at the same headline figure can cost wildly different amounts once the fees are in. Here is how to see through the quote and work out what you will actually pay.

The three things that make up the cost

  • The discount or service charge: the core cost of the finance, often quoted as a percentage per month or as a margin over the Bank of England base rate.
  • The commission or service fee: a percentage of each invoice, or of your turnover, charged for running the facility. On factoring this can be the larger cost, because it pays for credit control.
  • The extras: arrangement fees, minimum monthly fees, renewal fees, same-day payment charges, and audit or trust-account fees. These are where the real cost often hides.

Turn the quote into an annual rate

A charge of "1.5 per cent a month" sounds small. Over a year that is roughly 18 per cent before any other fees, and if you only borrow for part of the month but pay for the whole month, the effective rate is higher still. To compare facilities properly, convert everything to an effective annual cost on the amount you actually draw, for the time you actually use it.

A worked example

Say you advance £20,000 against an invoice and repay after 30 days. A provider quotes a 1.5 per cent discount fee plus a 0.5 per cent service fee:

  • Discount fee: £20,000 × 1.5% = £300
  • Service fee: £20,000 × 0.5% = £100
  • Total cost for 30 days: £400, an effective annual rate of around 24 per cent.

Now add a same-day payment fee and a minimum monthly fee if your invoice was small, and the real rate climbs again. The headline "1.5 per cent" told you almost nothing.

Comparing finance like for like

  • A bank loan: compare the APR, the arrangement fee and any early-repayment charge.
  • An overdraft: interest on what you draw, plus a facility fee whether you use it or not.
  • Invoice finance: the discount charge plus every service and admin fee, over the days you actually hold the advance.

What to ask before you sign

  • What is the total cost in pounds for the amount and the period I will actually use?
  • Is there a minimum fee or minimum term, and what happens if I use the facility less than expected?
  • Are there exit or renewal fees?
  • Is the cost a single transparent fee, or several charges stacked together?

The cheapest-looking quote is often the most expensive once the fees land. A single, clearly stated fee on the money you draw, for exactly the days you draw it, is almost always easier to judge, and harder to inflate, than a stack of percentages.