Factoring and Invoice Discounting services will help any growing business. Facilities should be set up in the first instance with the correct structure and managed to ensure excessive fees are not applied.
Here are examples of the varous elements which may impact on an invoice finance facility.
1) Service Fee – This is charged as a percentage of the value of the invoices that you submit to the factor and covers the costs of any collections, statements and monitoring. It is usually subject to a minimum fee, which is either monthly or annually. Make sure any invoices you input will not subsequently require credit notes, as you will have paid for nothing
2) Minimum Service Fee – This is not additional to the service fee above but can catch you out. The factor bases his figures on a projected turnover and this fee is usually around 80% to 90% of the projected turnover times the agreed service fee rate. If your business is seasonal, you can be caught out by a minimum monthly fee. Just be certain that the levels of turnover you are agreeing with the factor can be achieved.
3) Retrospective Fee – At the point a factor takes you on board, they usually take on existing invoices (typically covering the previous 3 months) and give you an immediate cash injection against these invoices. These invoices are past (termed retrospective debts), hence the factor refers to the service charge as being a retrospective charge. Ensure that the invoices they are taking on are ones you intend to factor, to minimise these costs.
4) Discount Fee – Factors legally buy debt rather than lend money, so they cannot call their charges interest; hence, they call it discount. It is calculated and charged in the same way as interest and is usually quoted as an amount above a minimum base rate. The more you borrow, the more you pay in discount, so by controlling your borrowing and getting customers to pay faster, the lower discount fees will be. Some factors charge a minimum base rate, or a minimum overall rate, which can inflate costs.
5) Trust Account Fee – This is usually where the factor is operating a confidential facility. Rather than the customers paying the factor, a separate bank account (which is controlled by the factor) is opened in your company name and customers make payments into that account. The banks charge for these accounts and the current market rate is circa 10p per £100 collected. Consider, do you really need a confidential facility?
6) Refactoring Charge – Where an invoice exceeds 3 months net before being paid, the factor reserves the right to levy an additional charge. Thiis is usually between 0.5% to 2% of the older debts, charged on a monthly basis and can add up! Ensuring customers have no excuses to withhold payment will remove this cost.
7) CHAPS/ Same Day payments – Some factors pay by BACS ordinarily when advancing cash to your account. This usually takes 3 days to get to your account and is free whereas, a CHAPS payment will cost circa £35! So, with a little management you should not need to draw same day monies and avoid this extra charge.
8) Bad Debt Protection – This varies in price across the factors but is essentially the premium that you pay to insure a debt against non payment by your customer. Some factors levy on a whole turnover basis and others will offer a selective policy, so you can chose who you want to insure. Remember, cover is at the behest of the insurance company who provide the cover to the factors. You usually get 90% of invoice value less VAT covered. Remember also that each claim will be subject to an excess of between £500 -£1,000, so smaller debts are invariably not worth covering, as you are paying a premium for no cover.
9) The factors will all have other potential costs, if you ask them to step outside of the normal day to day service. Overpayments are a good example, just try to manage your facilities sensibly and you should have a greater control over costs.
10) Finally, all Factors will want to charge you a set up fee, to cover their costs in arranging the deal for you. Bear in mind, they maybe charging a Retrospective Fee on the initial ledger and the cost of registering their security may only be minimal. That being said, on occasions, the complexity of the deal may require them to bring in specialist advisors or obtain an audit.
If you have any questions please do not hesitate to ask us here at Avanti and we will be glad to help.