Invoice discounting: the rate you were quoted and the rate you pay
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Every figure here is a field because every bank charges what it charges. Put in the proposal you actually received; a number written into the page would be this page inventing your offer.
Nothing on this page says whether to advance the money or wait. Someone who needs cash today has a reason this calculation cannot see. It only prices the decision.
Results
| Discount taken off the face value | — |
| Tax on the operation | — |
| What actually reaches you | — |
| Cost over the whole period, on the money you received, in percent | — |
| The same as a monthly rate, in percent | — |
| The same as a yearly rate, in percent | — |
| What multiplying the quoted rate by twelve would have said | — |
| Share of the whole cost that is the fixed fee, in percent | — |
The gap starts with something small and structural. The rate is applied to the face value, but the money that reaches your account is smaller than the face value, so you are paying interest on an amount you never received. Before any fee or tax, two per cent quoted is already two and four hundredths actually paid. That sounds like nothing and is not: compounded over a year it is part of why the honest annual figure sits well above the twenty-four per cent that multiplying by twelve suggests.
The same invoice at five different terms
| Days | What reaches you | Yearly cost, in percent |
|---|
Read the last column upwards and the charges that ignore time show themselves. With the figures this page starts with, fifteen days costs about fifty-nine per cent a year while sixty days costs about thirty-six, for the same rate on the same invoice. The short operation is the expensive one, and it is the one that sounds cheapest when it is described as a fee of fifty.
Prove it on the page rather than taking it on trust. Set the fee to zero and the short term is still the dear one, because the tax has not moved either: it is charged on the face value, not on the time. Set the tax to zero as well and the yearly cost finally flattens out, going from about twenty-eight at fifteen days to about twenty-eight and a half at ninety.
So it is not the shortness that makes a short discount expensive. It is every charge that does not shrink when the term shrinks: the same money spread over less time. The rate alone is close to indifferent to the term, which is exactly what the last experiment shows.
It follows that discounting many small invoices costs far more than discounting one large one for the same total, whenever the fee is charged per invoice. That is worth knowing before agreeing to a fee that was presented as a formality.
Why is the real cost higher than the rate I was quoted?
Because the rate is applied to the face value of the invoice, while the money that reaches your account is smaller than that face value. You end up paying interest on an amount you never received.
Before any fee or tax, two per cent quoted on the face is already 2.04 per cent on the money you actually got. Put the fee and the tax back in and the example this page starts with costs 2.97 per cent a month, which is 42.7 per cent a year, not the 24 per cent that multiplying the quoted rate by twelve suggests.
Why does a shorter term cost more?
Because of the charges that do not shrink when the term shrinks. The fee is the same amount of money whether the invoice matures in fifteen days or in ninety, and the tax is charged on the face value rather than on the time, so the shorter the operation the less time there is to spread both of them over.
With the figures this page starts with, fifteen days works out at about 58.7 per cent a year while sixty days works out at about 35.6, for the same rate on the same invoice. Strip the fee and the tax away and the same four terms sit between 27.7 and 28.5.
| Days | Yearly cost as the page starts | Yearly cost with the rate alone |
|---|---|---|
| 15 | 58.7% | 27.7% |
| 30 | 42.7% | 27.9% |
| 60 | 35.6% | 28.2% |
| 90 | 33.5% | 28.5% |
How do I know the fee and the tax are really the cause?
Zero them on the page, one at a time, and watch the last column. With the fee at zero the short term is still the dear one, 40.2 per cent at fifteen days against 30.7 at ninety, because the tax has not moved. With both at zero the yearly cost finally flattens out.
That is a controlled comparison rather than an argument: the same rate, the same invoice, one charge removed at a time. Whatever makes short discounts expensive, it is not the shortness by itself.
Is it cheaper to discount one large invoice or several small ones?
One large one, whenever the fee is charged per invoice. Ten invoices of a thousand carry ten fees; one invoice of ten thousand carries one, for the same money advanced. The tax does not change, because it follows the amount rather than the number of documents.
This is worth raising before agreeing to a fee that was presented as a formality, because it is the part of the proposal that grows with the number of documents rather than with the amount.
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