There’s no more widely adopted form of financing in the recruitment industry than invoice finance – especially for contract recruitment. Every invoice raised for a contractor has a timesheet attached and payment is virtually guaranteed, so invoice finance companies love to work with the industry – and that leads to competition, cost saving quotes, and so on.
Here at TBOS we’ve seen a number of agencies who’ve been burned by not looking below the surface of the quote and checking the fine print of the contract.
There are seven big points we’ve seen that can cost your agency a fortune on your invoice finance arrangement if you’re not careful. Interested? Then read on…
Check the Service Charge against the Discount Rate
Your quotation will give you a service charge – the fee to borrow funds against your invoices – and a discount rate – the interest rate charged on a daily basis against the funds you borrow.
It’s important to focus on the service charge, as that’s fixed based on your turnover, while a quick debt turnaround can deal with the interest rate. Don’t be suckered in by a low discount rate when the service charge is too high.
Minimum Annual Fees
In almost all cases, invoice finance providers levy an annual minimum fee charged quarterly or monthly, based on around 80% of the projected annual service charge – so take care that your projections are appropriate, or you could find yourself paying without reaping the benefits.
Who Chases the Debts?
Typically, invoice finance companies chase debts only 7 days after the invoice is confirmed overdue; this can also include verifying the invoice was received. There isn’t always much incentive for them to collect your debts in a timely fashion as they’re charging interest on your borrowed funds at a daily rate. You may want to ask them about CHOCCS (Customer Has Own Credit Control Solution) and chase yourself or speak to an invoice discounting facility to accelerate the process.
Refactoring Fees and Other Additional Charges
Your invoice finance arrangement will detail refactoring fees and other additional charges you might occur – renewal fees, same day drawdowns (often charged per transfer, so when your books are full this can really add up), trust account fees, set up charges and even more. Make sure you know what you’re getting into before you sign the deal.
In the Event of Over-Funding…
Your deal will also tell you what happens if your debtor book becomes over-funded; anything up to and including having to pay the facility immediately, losing the funds to pay your contractors or having your facility revoked are possible if you find yourself overstretched, especially if your client doesn’t pay in time.
Be aware, too, that with a 100% funding deal, if you realise it’s no longer appropriate for you and want to move to a regular invoice finance arrangement, you may not be able to generate the funds needed to buy out your deal.
Making Sure You Have the Right insurance
Invoice finance providers typically offer debtor insurance, and you may well want to have that in place – but that insurance will vary from provider to provider. Remember that Bad Debt Protection only covers you if the client goes bust, while Credit Insurance will help if the client can’t or won’t pay.
We also recommend that in cases where your turnover is £5m or higher that you check the pricing on a separate credit insurance policy against the price when it’s bundled in with your invoice finance.
Hitting the Concentration Limits
Concentration limits are put into these deals to reduce the worry your provider has that all of your eggs are in one basket, and they can trigger against high single client debtors and a too-high percentage of export debt against domestic debt. Know what happens when you hit these limits and keep your eye on things as you approach them.
A reputable invoice finance company will take you through the various clauses in their deal, but ultimately, the responsibility always rests on your agency to make sure you know what you’re agreeing to and what that quote actually involves.
TBOS will always be happy to discuss these risks when you’re considering quotations and we may be able to advise – or to set you up with our own TBOS Freedom program as an alternative. If you want to know more, you can always email us at [email protected], contact us here, or call us on 0845 8811 112.