WHAT TO LOOK FOR ON AN INVOICE FINANCE QUOTE
Invoice finance is used by a large number of recruitment agencies making contract placements, but as there are a large number of providers in the market, it can be a minefield on ensuring you are getting the best facility at the best price.
Our recommendation is to get at least three quotes from different providers when looking for invoice finance and ensure you are comparing each one on their cost-effectiveness and what funding they can provide you on your debtor book.
Below is a list of the parts of an invoice finance quote that you need to check and compare before agreeing to a new facility:-
Service charges are the fees charged based on a percentage of the client invoice. This percentage is determined on the 12-month projected turnover, the industry and creditworthiness of the clients. The higher the percentage, the more you will be charged. Sometimes the service charge percentage will include credit/bad debt protection (if required), or this may be charged as an additional percentage.
The minimum fees are the amount of service charge that the invoice finance company need to make on a monthly/quarterly/annual basis as a minimum. If the amount of service charge on the invoicing you have uploaded comes to below the minimum fee, then the service charge will be topped up at the end of the period. It is advisable to ensure these minimum fees are in line with your invoicing, so you are not charged additional service charges each month.
DISCOUNT CHARGES (INTEREST)
The discount charges are the interest rates charged on the funds you have borrowed from the invoice finance company. These are normally charged as a discount charge above the Bank of England, chosen bank or LIBOR base rates. Whilst the interest charged in borrowing large sums of money is not huge, as the interest rates are often around 2-4%, it is always best to have these as low as possible.
The pre-payment percentage is the amount of funding against your debtor book value that they are willing to fund up to. Permanent placements may only be funded to around 50-70%, but contract placements may be able to get funded up to 90% (based on the fact they have a signed timesheet). It is advisable to ensure that the pre-payment percentage will cover the amount being paid to your candidates as that is what you will need to borrow from the invoice finance company.
Concentration limits can be confusing for agencies using invoice finance for the first time and can sometimes catch them out if they have one large client. Often the invoice finance company will put a concentration limit on an agency to ensure that they have a spread of clients on their debtor book. If the concentration limit was 50%, this would mean that one client cannot be more than 50% of the overall debtor book or they would have to reduce the funding accordingly. If you only have one client, then you would need a concentration limit of 100%, or you may not be fully funded. Concentration limits can also be extended to levels of permanent invoicing or international exposure.
It is always important to understand how long you are tied into an invoice finance company in case you wish to leave beforehand. There will often be a contract length and a notice period, and if you decide to leave before this, you will have to pay the remainder of the minimum fees and/or a termination fee.
Re-factoring charges are a charge put on by some invoice finance companies as a penalty should an outstanding invoice exceed the agreed funding period. These charges may seem unfair as they are charging you twice for the same invoice before taking away the ongoing funding, but this is to try and ensure that the invoices are paid with your input.
It is always a good idea to get a list of the additional disbursement fees that may be charged on top of the headline charges. These may be set-up fees, documentation fees, audit fees, trust account fees, drawdown charges, annual renewal fees, facility increase fees to name a few plus additional charges if legal procedures need to be actioned on your clients.
Once you have compared each of these points, it is always advisable to question them with the provider to ensure there is no hidden charges or meanings before you sign the agreements.
TBOS has set up over 75 invoice finance arrangements over the past 11 years spread over nine different providers and manages the day-to-day management of the facilities for our agency clients. This involves us preparing 12-month projections to get the quotes from our panel of lenders, and once the lender has been agreed together, we collate the credit file to be sanctioned. Once the credit backed offer has been received, we manage the signing process and the start of the facility (either as a new agreement or a transfer to a new provider from another lender).
As TBOS is involved in this process and the day-to-day management of the facility, we can get preferential rates and facilities from our panel of lenders. Please contact our office if you would like further information on how we can help your agency with your invoice finance needs.