Invoice finance is often a requirement for recruitment agencies making temporary and/or contract placements as the finance provided will cover the payment to the contractor before the client makes payment. Invoice finance companies love the recruitment industry as every time a contractor invoice is raised it is virtually guaranteed to be paid as it has a signed/approved timesheet attached. However if you go with the wrong invoice finance provider or do not check the small print then you can sometimes be left with extra charges or ineligibles (unfunded debts) which can leave you without the required cash-flow to pay your contractors.
Below are nine examples of when an invoice finance arrangement may not be able to provide the full pre-payment against the invoices raised:-
- CLIENT CONCENTRATION
Invoice finance companies don’t like agencies to “put all their eggs in one basket” or have all their business with a few main clients. They may restrict the funding if a particular client on the debtor book goes above a certain percentage of the overall debt. If you make a large number of placements at one client or a client’s payment terms mean the debt will take longer to collect then it is advisable to speak to the invoice finance provider to see if they can increase the concentration on that particular client.
- EXPORT CONCENTRATION
Invoice finance companies see having a large portion of the debtor book being with clients based outside of the UK as a major risk and will often be concerned if the amount of export debt goes above 50%. The invoice finance company can restrict the funding on those invoices unless they feel comfortable with the credit worthiness of the client and proof of contract and payment terms.
- CURRENCIES AND COUNTRIES NOT ABLE TO BE FUNDED
Not all invoice finance companies can provide overseas funding and those who do may have a restricted list of countries and currencies that can be funded. Some will cover a large list of worldwide countries and other will only cover a handful of European countries so it is advisable to check before you sign up. It is also advisable to see which currencies can be funded as you do not want to suffer currency losses if the invoice finance company cannot provide the funding in the correct tender.
- CREDIT PROTECTION INSTEAD OF CREDIT INSURANCE
There are two types of debt protection available from invoice finance companies and sometimes it is not easy to distinguish which one is ideal for your agency. Credit Protection (or Bad Debt Protection) will only cover if the client goes bust, whereas Credit Insurance (or Protracted Default) will also cover if the client can’t pay/won’t pay after 120 days. Check with the provider beforehand so you are not caught out if you think you are covered and you are not.
5. DROP IN TURNOVER SO MINIMUMS KICK IN
When an invoice finance company provides a facility they will base the service charge on the projected turnover for the next 12 months. To ensure that the invoice finance company guarantees their fee they will include an annual minimum fee that you will need to pay if you do not hit the required target. This is to stop recruitment agencies projecting an unrealistic high turnover to get a lower service charge. It is important to know the required monthly turnover figure and to ensure business stays above this level so that the minimum fee doesn’t kick in and cost you more than necessary.
6. DISBURSEMENT CHARGES
When you are given an invoice finance quotation often they will show the basic costs including service charges, discount (interest rate) and contract duration. However extra costs or disbursements will be shown separately within the agreement so it is advisable to ask to see what additional charges may be incurred by having the facility.
7. REFACTORING CHARGES
Some invoice finance companies have a policy where if an invoice goes unpaid beyond a certain period then they will recharge the service charge (or even a higher charge) to ensure they can fund the debt for longer. This can sometimes double the invoice finance costs and if the invoice finance company are chasing the debtor book then this can seem unfair as the agency has no real control of reducing these charges.
8. CREDIT LIMITS AND FUNDING LIMITS
Invoice finance companies provide two different limits on their facilities (if they are providing some kind of credit protection). They provide a credit limit which is the amount that is covered by the insurance policy and a funding limit which is the amount that will be funded. Invoice finance companies are happy to provide the funding on certain clients which may not have a full credit limit. This means that if the client goes bust that has been funded beyond the credit limit then the agency would need to reimburse the invoice finance company the difference in funding.
9. PREPAYMENT LEVEL DOES NOT COVER THE CONTRACTOR AMOUNT
When an invoice finance company provides a funding facility they will agree a certain percentage of the invoice value they will advance. This can be anywhere between 75-90% so it is advisable to ensure that the funding matches the money needs to pay the contractors. If you are working to low margins then you will definitely need to ensure that the invoice finance company can provide the prepayment level at 90% or you will need to fund the difference to the contractor.
TBOS has helped set up and manage invoice finance arrangements for the agencies it manages on a daily basis. This has involved working with the agency to ensure that the panel of invoice finance lenders that quote for the facility can meet the agencies requirements and can be flexible on some of the issues shown above to continue to provide the finance required. TBOS also manages the day to day operations of the facility to ensure that ineligibles are kept to a bare minimum and excessive charges are virtually eliminated.