Is Factoring Cheaper Than an Overdraft or Loan?
Usually only when your funding gap grows with your sales or the bank will not extend your overdraft. On our example inputs (not market rates), covering a stable £50,000 gap with an overdraft at base plus 4.5% (8.5% at today's 4% base rate) and a 1.5% arrangement fee costs about £5,000 a year, while factoring on £600,000 turnover at a 1.5% service charge costs about £12,250 a year, because its service fee is charged on your whole turnover, not just the gap. This comparator puts the three side by side for your numbers and tells you plainly when invoice finance is the wrong answer.
| Invoice factoring | Business overdraft | Term loan | |
|---|---|---|---|
| You pay on | Whole turnover (service fee) plus funds drawn (discount charge) | Only what you draw, plus an arrangement fee | The full lump sum, all year, drawn or not |
| Facility size | Scales with your sales ledger | Fixed limit, often capped low, repayable on demand | Fixed amount, set at the start |
| Security | Your invoices (debenture), often no property charge | Often a personal guarantee or charge | Often secured or personally guaranteed |
| Usually cheapest when | The gap grows with sales, or the bank says no | The gap is small, stable and the bank approves | It funds a one-off purchase, not a recurring gap |
Comparator
Annual cost of covering the same working-capital gap three ways. Defaults are our own example inputs, not market rates; overwrite them with your real quotes.
Cheapest way to cover your gap
Source: Bank of England base rate 4%, as of 6 November 2026. Defaults are our own example inputs, not market rates or quotes. Indicative only: your actual terms depend on the provider, your ledger quality and your customers, and approval is never guaranteed. If you send an enquiry, we pass your details to one of the finance partners we work with, and the lender sets any actual terms.
| Option | You pay on | Usually cheapest when | Annual cost on our example inputs |
|---|---|---|---|
| Invoice factoring | Whole turnover (service fee) plus funds drawn (discount charge) | The gap grows with sales, or the bank says no | About £12,250 on £600,000 turnover (1.5% service, base + 2.5% on the gap) |
| Business overdraft | Only what you draw, plus an arrangement fee | The gap is small, stable and the bank approves | About £5,000 on a £50,000 gap (base + 4.5%, 1.5% fee) |
| Term loan | The full lump sum, all year, drawn or not | It funds a one-off purchase, not a recurring gap | About £6,000 on £50,000 at 12% for the whole year |
Source: Our example inputs (not market data), Bank of England base rate 4% as of 6 November 2026; not quotes
The structural difference in what you pay on, not the headline rate, decides the winner. For a stable capped gap the winner is often not invoice finance. Overwrite the calculator defaults with your real quotes.
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### Invoice factoring vs business overdraft vs term loan: how each is priced and when it is cheapest | Option | You pay on | Usually cheapest when | Annual cost on our example inputs | | --- | --- | --- | --- | | Invoice factoring | Whole turnover (service fee) plus funds drawn (discount charge) | The gap grows with sales, or the bank says no | About £12,250 on £600,000 turnover (1.5% service, base + 2.5% on the gap) | | Business overdraft | Only what you draw, plus an arrangement fee | The gap is small, stable and the bank approves | About £5,000 on a £50,000 gap (base + 4.5%, 1.5% fee) | | Term loan | The full lump sum, all year, drawn or not | It funds a one-off purchase, not a recurring gap | About £6,000 on £50,000 at 12% for the whole year | Source: Our example inputs (not market data), Bank of England base rate 4% as of 6 November 2026; not quotes The structural difference in what you pay on, not the headline rate, decides the winner. For a stable capped gap the winner is often not invoice finance. Overwrite the calculator defaults with your real quotes.
“As an invoice finance comparison site, we will still say it plainly: for a small, stable, predictable funding gap, an overdraft or loan is usually cheaper than factoring, because factoring prices on your whole ledger to solve a fixed-size problem. Use this tool to find when invoice finance is the wrong answer, not just when it is the right one.”
What this tool tells you
It compares the honest annual cost of covering the same cash-flow gap with invoice factoring, a business overdraft, or a term loan. Factoring is priced on your whole turnover, an overdraft only on what you draw, and a loan on the full balance all year. That structural difference, not the headline rate, is what decides the winner, and for a stable capped gap the winner is often not invoice finance.
Eligibility differs too: overdrafts are repayable on demand and increasingly hard to get at scale, loans usually need security or a personal guarantee, and factoring needs business-to-business invoices. For the editorial version of this comparison see invoice finance vs overdraft and invoice finance vs business loan.
Factoring vs overdraft vs loan FAQ
Is invoice factoring cheaper than a business overdraft?
Often not. An overdraft charges interest only on what you draw, so for a stable, capped funding gap it is usually the cheaper option if your bank will grant one. Factoring charges a service fee on your whole turnover plus a discount charge on advances, so its cost scales with sales, not with the gap. Factoring tends to win when the gap grows with your sales, when the bank has refused or capped your overdraft, or when you also want the provider to run credit control.
When is invoice finance the wrong answer?
When your funding need is small, stable and predictable relative to your turnover, and you can get a conventional overdraft or loan. In that case you would be paying a service charge on your entire sales ledger to solve a fixed-size problem an overdraft prices more cheaply. It is also usually wrong if your customers pay quickly already (short days-sales-outstanding) or if most of your sales are to consumers rather than businesses.
Why compare against a term loan at all?
A term loan gives you a fixed lump sum, repaid over years, with interest on the full balance whether you need it that month or not. It suits one-off investments, not a fluctuating working-capital gap. We include it because many businesses are offered one as the default, and seeing its full-year cost next to an overdraft and factoring makes the trade-off visible.
Are these real quotes?
No. The results are estimates using example inputs we chose (not market data) and the current Bank of England base rate. Your actual terms depend on the provider, your ledger quality, your customers and your credit profile. Nothing here is an offer or advice. If you send an enquiry, we pass your details to one of the finance partners we work with, and the lender sets any actual terms.
Founder & Managing Director, Muswell Rose, founder and PSC of Best Business Loans Ltd
Adam was managing director of Penny, a UK invoice finance business, from July 2020 to November 2023. His career runs through insurance, mortgages, commercial finance and fintech lending. He writes the Market Invoice library. Career record.
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