# The Math Behind Nav’s Invoice Financing Calculator

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Previously, we talked about the math behind our Merchant Cash Advance Calculator, Business Term Loan Calculator, Daily Debit APR Calculator (aka. OnDeck APR Calculator) and Kabbage APR Calculator. Today, we will be talking about how our Invoice Financing APR Calculator works.

Here is a quick recap on how Invoice Financing works. If you have an outstanding invoice, you can go to an invoice financing company to get 80-85% of invoice amount in advance. When the client actually pays the invoice, you will get the full invoiced amount back minus a factoring fee. The factoring fee is usually 0.5-4% a month based on how risky the borrower and the borrower’s clients are. But usually, you can get an advance as long as you have proof of the unpaid invoices. Your credit scores and business profitability is less of a concern because they have the invoice as the collateral. It’s not a cheap option for sure but it’s also not horrible compared to most merchant cash advances.

## How the Math Works

The math is actually quite simple since there’s only one advance and one payment.

• First, let’s calculate the interest charge you end up paying. Interest = (Invoice Amount) – (Total Amount Paid Back to You)
• Next, let’s calculate the monthly rate. We assume there’re 30 days in a month. (Monthly Interest Rate) = ((Interest + (Advance Amount))/(Advance Amount))^(30/(Invoice Due in Days)) – 1
• *APR = (Monthly Interest Rate) 12**

We assume monthly compounding here. Some other calculators may use daily compounding. Their APR will be slightly higher. We choose monthly compounding because you can make direct comparisons with a term loan, with a credit line from a bank or with a credit card.

## A Bluevine Example

Let’s use an example from Bluevine and see how the APR can be calculated. The following is a screenshot I took from Bluevine and a screenshot of their APR using our calculator.

As you can see, the overall financial cost is \$120 of a \$2550 advance. That’s ~ 4.7% over 4 weeks or equivalently ~ 60% over a year. It’s definitely not cheap but it’s an option if you don’t have other low fee credit lines available. If you are in a business that your client doesn’t pay right after you deliver the products/services, you should also consider pushing back paying your vendors. You can do that through getting trade lines from your vendors such as Home Depot or Staples and pay net 30/60/90. With that, hopefully you don’t need to borrow at 60% APR. Check out how to build up your business credit to get more favorable financing terms.