Invoice Finance – What Are You Paying For?
Working with invoice finance companies is essential for any recruitment agency which makes contract or temporary placements. Why? Because your contractors need to be paid when they submit their timesheets while the client will usually not pay so swiftly.
These companies make their money by offering funds against invoices for an agreed percentage of the invoice – usually in the 75-90% region. After payment is made by your client, the companies release the rest of the funds, minus a service charge based on the value of the invoice and agreed interest rates on the fund you borrow.
To most outside these companies, their service charge rates seem to be arbitrary or decided according to a highly complicated formula. In the recruitment world, we’ve noticed that if a Director is willing to guess, they talk about industry factors and credit risks.
Because we work with so many agencies at different sizes and in different industries, though, we get more perspectives, and we think we can name seven key factors. Knowing these may help you find better rates…
Factoring or Invoice Discounting?
These can both be offered to agencies, but which is offered depends on company age, turnover, and the capacity of the agency’s back office. Factoring facilities usually see a higher service charge because the job of managing credit control and funds reconciliation falls to the finance company.
If your agency has the capacity to handle debtor management, the fees you pay will be lower.
A primary factor in service fee charges is your projected turnover for the next 12 months. The company will usually lower their service charge for a higher turnover as an incentive to sign with them, knowing they’ll still make their money – but a minimum fee will be levied monthly or quarterly if you drop below a specified percentage of your projections.
This gives agencies a tightrope to walk, but the more accurate you are in your projections and goals the better your outcome will be.
Your Industry and Clients
Different industries have different non-payment risk levels, and that will obviously factor into service fees charged. Major clients who have a good reputation for making payments will also help, so you can often see a benefit from divulging your clients to your invoice finance company – and they may refuse to assist with invoices from clients who invoice through RPOs or intermediaries, due to concerns over payment.
The key phrase is the old one about eggs in baskets. If a high percentage of your debt is to one single company, that can raise concerns, and your finance provider may charge higher fees to offset the risk.
Chasing international debts can be more complex and currency fluctuations can devalue what’s owed. This makes international and currency placements a higher credit risk, leading to a higher charge – but if the deal is right, it’s still worth pursuing.
What Protection Do You Have?
Credit insurance and bad debt protection make finance arrangements safer and can therefore reduce fees. It’s important to bear in mind that you may still spend more than the saving you make on service charges, so you should be careful in your arrangements.
Payment Terms & Contractual Clauses
Invoice finance companies will take into account your payment terms in order to assess how much debt they’ll be carrying at any given time. Pay-when-paid, ban on assignment, and payment by application contractual clauses may also have an effect, and all of these can therefore increase the service charge.
As well as running our own alternative system in TBOS Freedom, we work with many invoice finance providers through our back office work for many different agencies, and we will always bring our experience to bear for our clients to make sure arrangements match the agency’s current and projected needs. We make sure that our agencies know what they’re committing to and what restrictions, if any, they’ll operate under.
This additional expertise can often secure lower, preferential rates due to the reduced risk your finance provider will run.
If you’d like to find out more about how we can help with your invoice finance arrangements, both current and future, why not call us on 0845 8811 112 or get in touch via our contact form?