Receivables advance: how to calculate the real cost
Advancing receivables means getting paid today for sales you would only collect later: card sales that settle in 30 days, card installments, or invoices on net terms. The lender or processor keeps a discount. The quoted rate looks small, but it is charged for every month advanced, so the real cost can be much higher than it seems.
How the discount is charged
Discount on each payment = amount × monthly rate × months advanced. Advancing a 6-installment card sale at 2.5% a month costs 2.5% on the first installment, 5% on the second and so on up to 15% on the last, about 8.75% of the sale in total.
The effective rate
The effective rate is the monthly interest rate that makes the amount you receive today equal to the future payments. It includes flat fees, so it is the right number to compare with a working capital loan, a credit line or simply waiting.
| Item | Value |
|---|---|
| Card sale, 6 installments | $12,000 |
| Advance rate | 2.5% a month |
| Discount | $1,050 |
| Net amount today | $10,950 |
When it makes sense
When the effective rate is lower than other credit you can get, or when the cash earns more than it costs, for example to take a supplier’s early-payment discount. If the business has spare cash, waiting for the normal term is usually cheaper. With invoice factoring on recourse terms, the business still pays if the customer does not.