Free tool
What is that facility actually costing you?
Working capital is sold on a headline rate, and the headline rate is almost never the price. The fees are charged on one number and the money you receive is another. This works the difference out, names every dollar of it, and shows you the figure a term sheet does not.
True cost of finance
Worked from figures entered by the reader. Indicative only, and not advice of any kind.
What you were quoted is roughly what you pay.
The fees do not move this one far. That is worth knowing too, because it means the headline rate is a fair basis for comparing it against something else.
What it actually costs
10.4%
Above the quote by
2.4 pts
Cost a year
$12,167
Interest and every fee.
Funds actually drawn
$116,667
What you have the use of.
If measured on the limit
4.9%
Not a real rate. It is how a facility gets made to look cheap.
Where the cost comes from
Interest on what you drew
$9,333
8% on an average balance of the funds actually used.
Line fee on what you did not draw
$2,000
1.5% on the undrawn headroom. A larger limit costs more even when you never touch it.
Establishment fee, spread
$833
3 years of expected life. Hold it for less and this line costs more each year.
A year, all in
$12,167
- The limit is more than twice what you typically draw, and you are paying a line fee on the difference. Headroom is worth having, but it is worth knowing what it costs.
Indicative only, on the figures you entered. A high effective rate is not the same as a bad facility: invoice finance costs more than an overdraft and also funds more, scales with sales, and can carry growth an overdraft will not. The point is to know the number before you decide, not to avoid the product.
The whole idea
Everything it costs, over the money you actually got.
That is the entire calculation. Interest, plus every recurring fee, plus the establishment fee spread over how long you keep the facility, divided by the funds you genuinely had the use of.
The denominator is where facilities are made to look cheap. Divide by the approved limit rather than the average balance drawn and an overdraft costing 10.4% presents as 4.9%. Nothing about the facility changed. You just measured the cost against money you never borrowed.
None of this is hidden, exactly. It is all in the term sheet. It is just never added up for you, and a small business owner comparing two offers on the two numbers printed in bold is comparing the wrong thing.
Three facilities, three traps
Each one is priced to look like something it is not.
| Facility | Where the cost hides | What it does to the rate |
|---|---|---|
| Overdraft or line of credit | A line fee charged on the headroom you did not draw, plus the establishment fee. | A $250,000 limit drawn to $117,000 on average, quoted at 8%, costs about 10.4% on the money actually used. |
| Invoice or debtor finance | The service fee is charged on the gross invoice. The money you receive is only the advance. | The same 8%, with a 1.2% service fee and 85% advanced, comes to about 31% on funds drawn. |
| Inventory finance | Stock audits and the insurance the lender requires, both annual and both yours. | $400,000 of stock at 60% advanced and 11.5% comes to about 16% once audits and cover are counted. |
| All three | The denominator. Measure the cost against the approved limit instead of the drawn balance. | The overdraft above drops from 10.4% to 4.9%, which is less than half, and nothing about the facility changed. |
Overdraft or line of credit
- Where the cost hides
- A line fee charged on the headroom you did not draw, plus the establishment fee.
- What it does to the rate
- A $250,000 limit drawn to $117,000 on average, quoted at 8%, costs about 10.4% on the money actually used.
Invoice or debtor finance
- Where the cost hides
- The service fee is charged on the gross invoice. The money you receive is only the advance.
- What it does to the rate
- The same 8%, with a 1.2% service fee and 85% advanced, comes to about 31% on funds drawn.
Inventory finance
- Where the cost hides
- Stock audits and the insurance the lender requires, both annual and both yours.
- What it does to the rate
- $400,000 of stock at 60% advanced and 11.5% comes to about 16% once audits and cover are counted.
All three
- Where the cost hides
- The denominator. Measure the cost against the approved limit instead of the drawn balance.
- What it does to the rate
- The overdraft above drops from 10.4% to 4.9%, which is less than half, and nothing about the facility changed.
A worked example
Quoted at eight per cent. Costs 31.1%.
$200,000 of invoices a month, 85% advanced, debtors paying at 45 days, a 1.2% service fee and a $12,000 establishment fee over 3 years.
The headline rate is not the price of this money.
The gap here is not a detail, it is most of the cost. That does not make the facility wrong, and for some businesses it is the only thing that funds the growth. But it should be a decision rather than a surprise. On invoice finance this is normal rather than exceptional.
What it actually costs
31.1%
Above the quote by
23.1 pts
Cost a year
$52,921
Interest and every fee.
Funds actually drawn
$170,000
What you have the use of.
Where the cost comes from
Interest on the advance
$20,121
8% on 85% of your invoices, for the 45 days your debtors take to pay.
Service fee on the gross invoice
$28,800
1.2% of the full invoice value, not of the amount advanced. This is the line that drives the rate.
Establishment fee, spread
$4,000
3 years of expected life. Hold it for less and this line costs more each year.
A year, all in
$52,921
The service fee alone is $28,800 a year, and it is charged on invoices whether or not the facility advanced you anything against them. That single convention, not the interest rate, is most of the difference between eight per cent and 31.1%.
What this does not cover
- Break costs, early repayment fees or what it costs to exit
- Any consumer comparison rate, which commercial facilities do not carry
- Whether a lender would approve the facility at all
- The value of what the funding lets you do, which is the other half of the decision
- Tax treatment of the interest and fees, which belongs with your accountant
Weighing one facility against another?
Effective rate is one input. What the structure does to your covenants, your security and your capacity to borrow again is the rest. The Debt Capacity Assessment models it from your actual financials. $1,850, 5 business days.
Want the finance arranged as well?
This site does the analysis and the documents, and does not arrange credit. The broking is done by The Lending Lab, a separate business run by the same person. Send a few details and Nicholas handles it himself.
Common questions
Because the quoted rate is charged on one number and the fees are charged on another. On invoice finance the interest applies to the money advanced to you, but the service fee applies to the full invoice value, and you only ever received a share of that. On an overdraft the line fee applies to the headroom you did not use. Add the fees to the interest, divide by the money you actually had the use of, and that is what the facility costs.
Because the limit is not money you have. A $250,000 overdraft you draw $116,000 against costs the same whichever way you present it, but measured against the limit it looks like 4.9% and measured against what you actually borrowed it is 10.4%. The second is the price of the money. The first is a number that makes a facility easier to sell.
No, and this is the part worth being careful about. Invoice finance is expensive on this measure and it also advances more than an overdraft will, scales as you grow, and can fund work an overdraft would never cover. A 31% effective rate on money that wins you a contract can be the best decision you make that year. What matters is that you know the number when you decide, rather than finding it later.
Then the establishment fee costs three times what it does spread over three years, and the effective rate rises accordingly. Change the expected life in the calculator and watch it move. Short-dated facilities with large upfront fees are where this bites hardest, and it is the reason a break or refinance can cost more than the rate suggests.
No. Comparison rates are a defined consumer credit concept with a prescribed formula, and commercial facilities do not carry them. This is the plainer arithmetic underneath: everything the facility costs in a year, over the money it actually gives you. It is not credit advice and it is not an offer of finance.
General information only. Not credit advice, not a credit assessment, and not an offer of finance. Andorra Advisory Group does not arrange credit and is not a credit representative. Rates and fee ranges shown are levels commonly seen, not any lender's pricing.