News Article

Hidden Costs of Factoring

Complicated products and complex pricing turns businesses away from invoice finance

A leading invoice finance provider has criticised non-bank factoring companies for over-complicating products and confusing customers with complex fees.

Nucleus Commercial Finance, which provides essential funding to SMEs in some of the most challenging business sectors including construction, says that some lenders are being disingenuous in their sales approach: “Many providers offer a low service fee to entice borrowers in and then load on a high amount of disbursements which make the loan much more expensive than it seems,“ says Chirag Shah, Nucleus Commercial Finance Managing Director.

“Arrangement fees, take-on fees, retro commission, discount charge, CHAPS fees, trust account charges, value dating charges per invoice schedule, charges to fund same day invoices, survey/audit charges, refactoring fees and credit insurance costs are just some of the charges that leave businesses bemused, bamboozled and ultimately disappointed with their lenders and our industry,“ he adds.

And the problem is worse for those working in construction: “The options for construction companies are minimal and the cashflow uncertainty from high disbursements can be even more challenging,“ he continues. “There is further uncertainty due to key elements of applications not being funded.“

Chirag highlights a number of key questions that construction firms need answers to before signing up to a facility, including:

  • What is the Contract Review Fee?
  • What is the turnaround time on these reviews?
  • How many days before you receive funding against the applications uploaded?
  • Will you receive funding against unapproved variations, CIS deductions, MCDs and retentions?
  • Will you be charged a refactoring fee on the retentions?
  • Is there a concentration limit on individual contracts?
  • How many uncertified applications will be funded on any contract/debtor?

One of the leading providers of invoice finance to construction companies charges an average of 0.7% of turnover to its clients as disbursements. In many cases, disbursements exceed the service fee agreed with the prospect.

In raising these concerns, Nucleus has developed an Invoice Finance Cost Calculator to demonstrate the true cost to business of the funding they have in place.

“We operate a fixed fee funding model that is totally transparent, and enables our customers to project the true cost of invoice finance so that there are no unpleasant surprises,“ he concludes. “Knowing what your costs are going to be, upfront, helps businesses to succeed and dramatically reduces the likelihood of business failure.“

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