Invoice Financing Calculator

If you’re seeking to enhance your cash flow management, consider invoice financing—an option sometimes referred to as invoice factoring or invoice discounting, though these terms have distinct meanings.

As a small business owner accustomed to operating on credit terms with your clients, you understand the challenges of maintaining cash flow. Even after completing a profitable project, you may not receive payment until your client settles their invoice, which could take up to 90 days. During this time, you still have financial obligations such as payroll and supplier payments to fulfill.

Invoice financing offers a practical solution by providing immediate access to the funds tied up in your outstanding invoices. This capability allows you to address temporary cash flow gaps or capitalize on time-sensitive business opportunities without waiting for invoice settlements.

Interested in understanding the costs associated with invoice financing? Explore our invoice discounting cost calculator to estimate the expenses involved and gain clarity on how invoice financing can benefit your business’s financial health.

• How Can Invoice Financing Help?

  • Select invoices you wish to finance.
  • Lender will issue you a percentage of the invoices, known as an advance. The remaining balance is held in reserve. 
  • Lender charges a fee known as a factor (or discount rate), often weekly, until the invoices are paid in full.
  • With invoice factoring, once the invoices are paid, the lender issues you the reserved balance, minus fees.

  Learn more about invoice and accounts receivable financing. 

Before you use the accounts receivable financing calculator, it’s helpful to familiarize yourself with key terms that you’ll encounter and should comprehend. Understanding these terms will ensure that you can accurately interpret the results and make informed decisions about your financing options.

Advance Rate

Understanding the advance rate is crucial when considering accounts receivable financing. This rate indicates the percentage of the invoice value that a lender will advance to your business when you choose to finance your receivables. It’s determined based on factors like your industry, the size of each transaction, and the lender’s risk assessment criteria. Typically, businesses can expect to receive between 70% to 90% of the total face value of their accounts receivable upfront.

For example, at iBusinessLender, we typically apply an advance rate of 80% in our invoice factoring calculator. This means that if you finance an invoice worth $10,000, you can expect to receive $8,000 immediately from us, helping you maintain cash flow and meet immediate financial needs while awaiting full payment from your clients. Understanding and leveraging the advance rate can significantly impact your cash flow management and overall financial strategy.

Reserve

The reserve refers to the portion of the invoice’s value that is not initially provided to the business. This withheld amount acts as a safety net or buffer. Once the customer settles the invoice in full, the reserve amount is subsequently released and returned to the business. This ensures that any potential deductions or disputes can be managed without financial risk to the lending party.

Factor Fee

A factor fee structure involves the lender charging a small percentage of the invoice amount, typically ranging from 1% to 3%, on an ongoing basis until the full balance is paid off. As a result, the longer it takes for the invoice to be settled, the more you’ll end up paying in factor fees. These fees are deducted from the reserve amount that was initially held back.

To accurately calculate your payments, you can use our online invoice financing calculator. For precise results, you’ll need to know your factor rate, which is the percentage fee applied to the invoice amount. This information will help you understand the costs associated with your financing and manage your cash flow more effectively.

Rebate

When your customer pays the invoice in full, your lender will return a portion of the advance that was held in reserve. However, this amount will be reduced by any applicable fees. This process ensures that the lender’s costs and risks are covered, while you receive the remaining funds that were initially withheld as a safeguard. This rebate helps maintain financial stability and transparency between the business and the lender.

Now that we have explained the key concepts behind our invoice financing calculator, you are equipped to estimate your costs. By understanding the factors involved, such as reserve amounts and factor fees, you can use the calculator to gain a clear picture of your financing expenses and plan your cash flow accordingly. This tool will help you make informed decisions and effectively manage your financial operations.

• Step 1

  Enter the total value of the invoice you plan to finance.

• Step 2

  Enter the estimated invoice factor fee into the calculator.

• Step 3

  Choose the invoice’s net terms in weeks. If you’re dealing with a customer who tends to pay late but with whom you have a close relationship, you can adjust the terms accordingly.

• Step 4

  Determine your payment calculations. We recommend exploring various terms to gain a comprehensive understanding of the potential funding costs, whether your customer settles their invoice in 30 or 120 days.

Invoice Financing Calculator Example

Let’s delve into an example to understand how an invoice financing calculator works and how different elements interact within an invoice financing arrangement.

Consider Nick’s Roofing Company, which decides to factor a $20,000 invoice. The lender advances 80% of the invoice value to Nick, providing him with $16,000 upfront. The lender applies a weekly factor fee of 1% on the invoice amount until it is paid in full.

In this scenario, Nick’s customer takes 8 weeks to settle the invoice. Over this period, the total factor fees accumulate to $1,600. These fees are deducted from the reserve amount, which is the remaining 20% of the invoice value ($4,000). After subtracting the fees, Nick receives a rebate of $2,400 from the reserve.

This example highlights how the initial advance, reserve, and factor fees work together within an invoice financing arrangement, allowing Nick to manage his cash flow while waiting for his customer to pay.

Now that we’ve covered the basics of invoice financing and how to use a receivables financing calculator, let’s explore how lenders determine the advance and factor rates for small business owners.

Unlike other short-term funding options, the creditworthiness of your business is not the primary concern in invoice financing. Instead, the focus is on the creditworthiness of your customers. Invoice financing companies conduct thorough evaluations of your customers’ payment histories, along with business credit checks and reputation analyses.

Although there are fewer stringent requirements, the financial health of your business still plays a role in the advance and factoring rates you’re offered.

For example, a lender will consider the following factors:

1. Average Collection Period: This is the average time it takes for your company to collect payments from customers. Generally, a shorter collection period means a lower risk of default, which can result in lower factor fees and higher advance rates for your business.
2. Customer Portfolio Diversity: A diverse customer base with evenly distributed sales reduces overall risk. Businesses with a wide array of customers typically receive better factoring and advance rates compared to those heavily reliant on a few clients.
3. Sales Volume: The volume of accounts receivable you plan to finance each week impacts your factor and advance rates. Typically, financing a larger number of invoices leads to lower factor rates and higher advance rates.

By understanding these criteria, you can better prepare and position your business to secure favorable terms when seeking invoice financing. This knowledge will help you manage your cash flow more effectively and make informed financial decisions.

As with any financial service, terms and conditions can vary significantly. Therefore, it is essential to thoroughly review all details when using the online invoice financing calculator to estimate your payments. Be mindful of additional lender fees that may not be included in the initial calculation.

Common financing costs that might not be accounted for in an invoice finance charge calculator include:

• Application Fees: Charges for processing your application and assessing your eligibility.
• Origination Fees: Fees associated with setting up the financing agreement.
• Servicing Fees: Ongoing charges for managing and servicing your account.
• ACH and Bank Wire Fees: Costs incurred for electronic funds transfers and wire payments.

By considering these additional costs, you can gain a more comprehensive understanding of your total financing expenses and ensure that you are fully prepared for all potential charges. This careful assessment will help you make more informed financial decisions and better manage your business’s cash flow.

Calculating the total cost of factoring invoices can be complex, even if you are familiar with invoice financing. However, by entering your invoice amount, advance rate, and term into our invoice payment calculator, you can obtain a clearer understanding of the potential costs associated with financing your invoices.

If you have any questions about whether invoice financing is the right choice for your business or need help interpreting the results from the invoice finance calculator, consider consulting with an iBusinessLender Business Advisor. These experts can help you understand and navigate the various terms and connect you with reputable lenders in the industry. They are equipped with the knowledge and resources to ensure you make well-informed decisions that best suit your financial needs.