Invoice Discounting Cost Calculator
Two percent sounds like nothing. Over 45 days it is close to 19 percent a year, and frequently more expensive than simply drawing on the limit you already have. This converts the quote into a number you can actually compare.
The invoice and the offer
A 2% discount over 45 days sounds small. Annualised it is 19.1%, because you are paying that cost for 45 days of money rather than a year of it. You give up Rs.23,000 to receive Rs.9,77,000 today instead of Rs.10,00,000 in 45 days.
Drawing the same amount on your cash credit limit for the same period would cost Rs.16,863, which is Rs.6,137 cheaper.
Break-even tenure. At this discount and fee, the invoice would need to be 61 days from maturity for discounting to cost the same as your limit. Anything shorter than that and you are paying a premium for speed. Anything longer and discounting wins.
With recourse. If your customer does not pay, the financier comes back to you. You have been paid, but you have not transferred the risk, and the exposure sits on your books until the invoice settles. Price that accordingly, because a without-recourse facility at a higher discount can be the cheaper arrangement once a single default is factored in.
KarobarUdhar Insider Tip
The reason short-tenure discounting looks cheap is that the cost is quoted as a flat percentage of the invoice rather than as a rate over time. Two percent on a 45-day invoice is roughly 16 percent annualised. Two percent on a 30-day invoice is nearer 25 percent. The same headline number gets more expensive the sooner your customer was going to pay anyway, which is the opposite of what most owners assume.
KarobarUdhar Insider Tip
Before discounting an invoice on a large buyer, check whether the 45-day payment rule already applies to you. A registered micro or small enterprise supplying a larger buyer has a statutory entitlement to payment within the agreed period, capped at 45 days, with interest payable on delay. Paying 16 percent annualised to accelerate money you are legally owed sooner is a choice worth making knowingly rather than by default.
Indicative only. The annualised figure is computed on the amount you actually receive rather than the invoice face value, which is the correct basis for comparison against a borrowing rate. Actual discount rates on a platform depend on the buyer's credit rating rather than yours, and vary by auction. GST treatment of the discount and the platform fee is not modelled here.
Why a flat discount misleads
Every other form of business borrowing is quoted as a rate over time. Invoice discounting is quoted as a flat percentage of the invoice, which makes it look like a transaction fee rather than a cost of money. Put the two side by side without converting and discounting will always look cheaper, because you are comparing a per-transaction number against an annual one.
The conversion matters most on short invoices. The same two percent costs roughly 14 percent annualised over 60 days, 19 percent over 45 days, and nearer 29 percent over 30 days. A buyer who was going to pay you next month is the most expensive buyer to discount against, which runs directly counter to instinct.
None of this means discounting is a poor arrangement. It converts a receivable into cash without adding debt to your balance sheet, it can be priced off your buyer\u2019s credit standing rather than yours, and for a business at its limit ceiling it may be the only capacity available. The point is to know what you are paying for that.
How to use it
- Enter the invoice and the discount offered. Use the discount as quoted, as a flat percentage of the invoice value.
- Enter days to maturity, not payment terms. The days remaining until the invoice is actually due. This is what drives the annualised figure.
- Add the platform or facilitation fee. Easy to overlook and it sits on top of the discount. Both reduce what reaches you.
- Compare against your own limit rate. The tool shows what the same money would cost drawn on your cash credit account for the same period.
Common questions
Why does a 2 percent discount work out to nearly 20 percent a year?
Because you are paying that 2 percent for 45 days of money, not for a year of it. Annualising it means asking what the same cost would be if you repeated the arrangement roughly eight times across a year. The shorter the invoice tenure, the more expensive the same headline discount becomes, which is the opposite of what most owners assume.
Is invoice discounting cheaper than a cash credit limit?
Not automatically, and often not at all. A limit charges interest on the daily outstanding at your sanctioned rate. Discounting charges a flat percentage regardless of how few days the money is out. The calculator shows the tenure at which the two cost the same, and below it the limit is usually cheaper.
What is the difference between with and without recourse?
With recourse, if your customer does not pay, the financier recovers from you. You have been paid but you have not transferred the risk. Without recourse, the financier carries the default risk, which is why it costs more. A without-recourse facility at a higher discount can be the cheaper arrangement once a single bad debt is factored in.
Does my own credit rating decide the discount rate?
On a platform like TReDS the rate is largely driven by your buyer’s credit standing rather than yours, because the financier is taking a view on who will actually pay the invoice. This is why a small supplier to a large corporate can often discount at a rate far better than its own borrowing rate.
Should I discount an invoice from a large buyer at all?
Check first whether the statutory payment timeline already covers you. A registered micro or small enterprise supplying a larger buyer is entitled to payment within the agreed period, capped at 45 days, with interest payable on delay. Paying an annualised premium to accelerate money you are legally owed is a choice worth making deliberately.