Invoice Factoring Cost and Effective Annual Rate Calculator
Reviewed by Finin2min Editorial Desk · Last reviewed 11 August 2026
Estimate cash received, fees, financing interest and effective annualised cost of factoring an invoice.
Factoring quotation
Initial cash advance
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Total financing cost
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Reserve released after collection
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Approximate annualised cost on advance
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Calculation guidance will appear here.
How This Is Calculated
Factoring releases a proportion of an invoice before the buyer pays. This tool deducts the service fee and fixed charges upfront, then financing interest from the reserve at collection. Its annualised percentage is total charges divided by gross advance, multiplied by365/collection days; it is a simple quotation comparison rather than an APR or cash-flow IRR.
Frequently Asked Questions
Why is the effective annual rate of factoring higher than the stated fee?
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Because the fee is charged for a short period (often 30-90 days until the invoice is collected), and annualizing a short-term fee percentage produces a much higher rate than the headline number — a 2% fee for 30 days, for example, annualises on the gross advance to a significantly higher annualized cost.
What is the "reserve" in invoice factoring?
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The portion of the invoice value not advanced upfront — held back by the factoring company and released to the business once the invoice is actually collected from the customer, minus the fees and any interest charged for the financing period.
Method and primary sources
The calculator adds the service fee, financing interest for the stated collection period and fixed charges, then compares that cost with the cash advanced. The annualised result is a simple comparison rate, not a lender quotation, IRR, tax opinion or representation of every contractual cash flow. Check recourse, reserve release, minimum charges, overdue pricing, GST and buyer-default allocation in the actual agreement.
A ₹1,00,000 invoice, 80% advance, 1% upfront fee and zero interest gives ₹79,000 now plus ₹20,000 at collection: total ₹99,000, with ₹1,000 charged once. At 12% financing interest for 30 days on ₹80,000, interest is ₹789.04 and final settlement ₹19,210.96. GST on fees and recourse losses are excluded; use a positive collection period.
Primary references
Sources checked 21 October 2026. The result applies only to the facts and scope stated above.
Scope: Computes the effective cost of invoice factoring (selling receivables to a factor at a discount for immediate cash), expressed as both the discount amount and the effective annualised rate.
Calculation logic
Advance amount = Invoice value × Advance rate percentage offered by the factor.
Factoring fee = Invoice value × Factoring discount rate for the period the invoice is outstanding.
Effective Annual Rate (EAR) = ((Factoring fee ÷ Advance amount) × (365 ÷ Days invoice outstanding)) × 100, to allow comparison against other financing costs (e.g., a working capital loan's APR).
Inputs and assumptions
The factoring discount rate entered is treated as the rate for the specific invoice period entered, not automatically an annualised figure — the calculator computes the annualisation separately.
Reserve/holdback amounts (if the factor withholds a portion until final collection) are shown if entered by the user.
Exclusions and edge cases
Does not model recourse vs non-recourse factoring risk allocation differences — the user should account for that in comparing quotes from different factors.
This is a cost-comparison tool, not a factoring agreement or credit facility.
Sources
No external regulatory source applies — this is a general financial formula, not a statutory computation.
Review status: reviewed and approved by CA Nikhil Gupta on 18 July 2026.
Guides that use this calculator
Background, worked examples and the rules behind these numbers.