About the Invoice Discounting Cost
Invoice discounting turns a receivable into cash before the customer pays: the financier advances a percentage of the invoice now, charges interest for the days until the customer pays and a processing fee, and settles the balance on collection. The quoted rate looks modest; the effective annual cost can be much higher because the fee is charged on the whole invoice for a short period.
Enter the invoice value, the advance percentage, the interest rate per annum, the expected days to collection and the fee percentage. The calculator shows the advance, the interest, the fee, the total cost and the effective annual rate on the money you actually received — the number to compare with a cash-credit limit or a bill-discounting facility from your bank.
TReDS platforms (RXIL, M1xchange, Invoicemart) give MSMEs competitive bids on invoices to large buyers; the same arithmetic applies to the bid you accept.
How to use it
- 1Enter the invoice value and the advance percentage the financier pays now.
- 2Enter the interest rate per annum and the expected days until the customer pays.
- 3Enter the processing or platform fee as a percentage of the invoice.
- 4Read the cost and the effective annual rate on the advance.
How this is calculated
Advance = invoice × advance % Interest = advance × rate × days ÷ 365 Fee = invoice × fee % Total cost = interest + fee; effective annual rate = total cost ÷ advance × 365 ÷ days
Frequently asked questions
Why is the effective rate so much higher than the quoted rate?
A flat fee of 1 % on a 45-day invoice is equivalent to about 8 % a year on its own, before interest — and it is charged on the full invoice while you received only the advance. Short tenures make fees expensive.
Is this cheaper than a cash-credit limit?
Usually not, if you have a limit with headroom. It is faster and needs no collateral, which is why it is used for growth or for a customer who pays slowly. Compare the effective rate with your CC rate.
What is TReDS?
Trade Receivables Discounting System — RBI-regulated platforms where MSME invoices to corporates and PSUs are auctioned to financiers. Buyers above a turnover threshold must be registered, and bids are often well below informal discounting rates.
Who bears the risk if the customer does not pay?
In recourse discounting, you do — the advance becomes a loan. In non-recourse factoring the financier does, at a higher fee. Read the agreement.