Invoice Finance goes hand in hand with recruitment especially on contract recruitment as every invoice that is raised has a timesheet attached which virtually guarantees payment. Due to the growth in the recruitment market there is increasing competition between invoice finance companies to provide cost saving quotes and more funding where possible. This means invoice finance companies are eager to give funding to new start up agencies or review existing invoice finance arrangements to see if there is a saving to be made to move them to their facility. However, a new quotation may look like a good deal on the face of it but actually have hidden costs that may end up costing more in the long run.
TBOS has set up over 30 new invoice finance arrangements over the past 5 years and helped save many agencies thousands of pounds on their facilities by reviewing and in some cases moving to a new provider. TBOS works with a panel of reputable lenders to ensure that the facilities we provide are the cheapest on the market and also provide the services required based on the agencies requirements. During that time we have found that many agencies that have come to us have previously signed up to invoice finance facilities which had excessive hidden charges or were not providing the funding levels required.
Below are some of the misunderstandings that, due to which the cost of invoice finance facilities was higher than expected by the agency:-
- SERVICE CHARGE AGAINST DISCOUNT RATE
When you get a quotation for an invoice finance arrangement you will be quoted a service charge and a discount rate. The service charge is the fee to borrow the funds based on the value of your invoices and the discount rate is the interest rate charged on a daily basis against the funds you borrow. When negotiating with the invoice finance company the main charge to look at is the service charge as this is a fixed fee based on your turnover and if the debt is collected quick enough then the interest charge will be minimal.
- MINIMUM ANNUAL FEES
Most invoice finance companies will impose an annual minimum fee as part of their facility which will be charged either monthly or quarterly. This fee is to ensure that the invoice finance company makes enough money on the deal based on the projected turnover of the business. This is normally based on around 80% of the annual service charge so if the company fails to meet 80% of their projections the invoice finance company will still get their fee. Getting the annual projections correct is important to ensure that you do not fall under your minimum fees each month/quarter.
- CHASING DEBTS ON YOUR BEHALF
Understanding the invoice finance companies dunning/chasing cycle is important as it may shock you at the procedure they follow. Most invoice finance companies will only chase debts 7 days after invoices overdue which can also include verifying that the invoices have been received. This is very counterproductive but when they are charging interest on the funds you borrow and in some cases charging refactoring fees there is very little incentive for them to collect your debts (even though it is their money at stake!). Ask the invoice finance company if you can collect the debts yourself if necessary using CHOCCS (Customer Has Own Credit Control Solution) or through an invoice discounting facility.
- ADDITIONAL CHARGES LIKE REFACTORING FEES
When reviewing the invoice finance deal ensure you check what additional charges you could incur. Same Day drawdowns can vary from £3 to £35 per transfer depending on which provider you use. Refactoring charges can be extremely frustrating especially when you are not chasing the debts and are charged should your debts become overdue (however, not all companies charge them). Renewal fees, trust account fees, set up charges and other disbursements are other items you should also question in any agreement.
- OVER-FUNDING OR 100% FUNDING DEALS
Understanding what happens should the invoice finance company over fund your debtor book is vitally important especially if a client doesn’t pay on time or if you have a 100% funding deal (i.e. Pay-And-Bill) as this could mean that you have to pay back a facility straight away, you may not have enough funds to pay your contractors or the provider may revoke your facility. Also, if you have a facility providing you 100% funding and you decide to move to a regular invoice finance arrangement (i.e. 85-90% prepayment) your debtor book against the cash position may not be large enough to generate the funds to buy the facility out.
- BAD DEBT PROTECTION NOT CREDIT INSURANCE
Depending on your client base and sector you may decide to include debtor insurance with your invoice finance facility. However not all invoice finance providers offer the same insurance and this will be normally split into Bad Debt Protection and Credit Insurance. Bad Debt Protection will only cover the debt if the client goes bust but credit insurance will also include if the client can’t pay/won’t pay (sometimes called protracted default). Getting the right policy for you is important. It is also worth noting that if your turnover is above £5m it is advisable to see the difference in pricing from getting a credit insurance policy separately from the invoice finance facility.
- CONCENTRATION LIMITS – SINGLE CLIENT OR EXPORT DEBT CONCENTRATION
Understanding what happens if you hit or exceed any concentration limits on your facility is important as this can affect the funding levels. Concentration limits can include single client debtors or export debt concentration (i.e. percentage of export debt against domestic debt). Most invoice finance companies do not like all their eggs in one basket and see having one client as a risk. Also, having too much debt outside of the UK can provide too much exposure for an invoice finance company and they can reduce your funding accordingly.
Reputable invoice finance companies should make you aware of all the pitfalls of their facility but it is up to the directors of the agency to ensure they question every part of an invoice finance quotations and ensure that they are comparing like for like quotes.