Jargon Buster – Invoice Finance
Invoice Finance is a staple in the recruitment industry for agencies providing contract or temporary roles. This funding provides upfront finance to pay candidates before the clients make payment and is based on the growth of the debtor book and the clients invoiced. However, when an agency looks to set up an invoice finance facility, the jargon used by the invoice finance companies can be very confusing and if you do not understand what is being provided, you can end up incurring additional fees and charges.
Below are a list of terms that are used by invoice finance companies and the explanation of what they actually mean:-
- All Asset Debenture
An ‘All Assets Debenture’ is a charge lodged at Companies House against the agency to reflect that the book debts are owned by the invoice finance provider. This protects the funds provided by the invoice finance company and ensures that the debts cannot be sold to another provider, or used as collateral. It also ensures that should the agency fail, the invoice finance company can recoup their money back by collecting their funds from the clients directly.
- Bad Debt Protection
‘Bad Debt Protection’, or ‘BDP’ is a type of insurance provided by some invoice finance companies to protect the debts against the clients going bust. The agency needs to ensure that they apply for a credit limit to support the amount of outstanding debt in order to remain protected. You can expect the additional service charge for this protection to be between 0.25% and 0.4% of turnover, depending on the provider.
- Credit Insurance
Credit Insurance is another type of insurance provided by some invoice finance companies to not only protect the debts should the client go bust but also cover the debts should the client not pay or cannot pay within terms. This enhanced insurance provides the agency with added protection but the agency needs to ensure they have a sufficient credit limit in place to support the outstanding debts to remain protected. You can expect the additional service charge for this protection to be between 0.25% and 0.4% of turnover depending on the provider.
‘Disbursements’ are the additional charges imposed by the invoice finance provider for various tasks such as bank transfers, advances and credit checks. Often these disbursements are not detailed in the main agreements and can vary depending on the invoice finance provider so it is important to understand these charges before you engage the provider.
- Discount Rate
The ‘Discount Rate’ is the invoice finance industry’s way of reflecting interest on the funds borrowed. The Discount rate is often calculated above the Bank of England Base Rate or above the LIBOR rate (both of which fluctuate), and is charged as a daily interest rate on the funds lent by the invoice finance provider. You can expect this rate to be between 1.75% and 3.5% above the base rate mechanism.
‘Factoring’ is a type of invoice finance where the invoice finance company lends funds against individual invoices on the debtor book, rather than a batch upload. The invoices are assigned to the invoice finance company individually so they can credit control the invoices on behalf of the agency and provide funds on each invoice. Factoring is often a more expensive type of invoice finance as the invoice finance company has to reconcile the debtor book and credit control the invoices, so will add this to their service charge.
‘Ineligibles’ are where the invoice finance company does not provide funding against certain invoices. This could be due to a number of reasons such as the debt being over the agreed funding period, the invoices are being disputed or concentration of debt. The ineligible value is deducted from the current aged debtor and will reduce the amount being funded by the invoice finance company.
- Invoice Discounting
‘Invoice Discounting’ is the other type of invoice finance facility offered and is provided against the full debtor book value, instead of against individual invoices. The agency will notify the invoice finance company of the total value of invoices raised and funding is then provided against this. This means that the agency needs to reconcile their books to ensure the debtor book values match the invoice finance company’s records, and credit control the debts accordingly. This type of facility is often much cheaper than factoring as many of the tasks are completed by the agency itself, but this option will only be provided if the agency has a strong back office process in place.
- Minimum Fees
‘Minimum Fees’ are often put into invoice finance arrangements to ensure that the invoice finance company guarantee a minimum annual income on a facility. This fee is based on the agency spending a minimum amount of service charge each month/quarter and if this is not reached then the difference is taken.
- Personal Guarantee
A ‘Personal Guarantee’ or ‘PG’ is often taken by the invoice finance company to protect themselves should the agency fail. This guarantee contractually ensures that the directors will aid the invoice finance company in collecting in the debts or they will have to repay the outstanding funds (to the value of the personal guarantee) if the agency fails. If all of the invoices are valid then there should be no reason for the personal guarantee to be called on but should any “fresh air invoices” be raised then the personal guarantee provides protection for the invoice finance company.
- Prepayment Percentage
The ‘Prepayment Percentage’ is the funding percentage provided of the invoices raised. Most invoice finance companies can provide recruitment agencies between 75-90% of the invoice value on contract placements and between 50-75% on permanent invoices.
- Refactoring Charges
‘Refactoring Charges’ are archaic methods used by some invoice finance companies to charge recruitment agencies should an invoice go over funding terms. The invoice finance company will not only charge the fee but also take away the funding provided, so it is a double hit for the agency. Many invoice finance companies will not charge these fees but there are still some who have this within their agreements.
- Service Charge
‘Service charges’ are the main charges imposed by the invoice finance companies and are charged against the full invoice value, including VAT. In order for the invoice finance company to calculate the rate that should be charged, they will ask the agency to project their potential 12-month turnover at the beginning of the arrangement, give an indication of the clients they will be billing and explain how the back office and accountancy process will be completed. This then allows the invoice finance company to predict how much funding will be required and highlight any risks associated with providing the facility. You can expect this rate to be between 0.2% and 1.75% of the full invoice value.
TBOS has many years experience in setting up and managing the day to day running of invoice finance arrangements for recruitment agencies and ensures that they run as smoothly and cost effectively as possible. TBOS has relationships with many different providers, allowing us access to the best possible rates on the market and ensure that the agency directors understand exactly what they are signing up for. Once the facility is in place, the staff at TBOS will manage the day-to-day tasks of uploading the debtor book, managing the credit limits, drawing down funds, credit controlling the debts and reconciling the invoice finance records.