Invoice Finance – some typical facility terms explained

Posted: 14th December 2016

If you are considering invoice finance it is very important to understand the terms and how these can impact your business. Here are 5 invoice finance terms that you must check before entering into an invoice finance facility:

1) Monthly minimums

When speaking to invoice finance companies you will be asked what you feel your projected turnover is for the next 12 months. This is so that the provider can price their service to you based upon the level of work involved. They will then usually include a monthly minimum fee in their offer to you. This is to ensure that the invoice finance company guarantee a minimum fee and don’t provide a service and end up making a loss.
It is important to provide realistic projections as you don’t want to be caught out in a 12 month agreement paying £850 a month, when your business can only afford £350. Another important point to note with minimums, is that for seasonal businesses, monthly minimums don’t work. To be charged a fee for months where you won’t be doing any turnover due to the time of the year is unfair and could negatively impact your business.
Speak to the invoice finance company and see how flexible they are to perhaps offer annual minimums or indeed none at all.

2) Concentration Limit

Concentration relates to the spread of debt across your customers. If your sales ledger is £100,000 and you have 5 customers owing you £20,000 each, then the concentration of the ledger will be 20% per customer. If you have only one customer then the concentration is 100%.
The more concentrated your ledger the greater the risk and if you are dealing with only a few customers, some invoice finance companies will look to restrict their funding. The standard concentration limit for many invoice finance providers is 20%, so any customer balances over this limit won’t be approved for funding.
There are ways to overcome this potential limitation. Some lenders will suggest Bad Debt Protection and do away with concentration limits all together. Other Invoice Finance providers will be flexible, particularly if your customers are well credit rated. The bottom line is you need to ask about the limit and ask if it will affect your available funding.

3) Disbursements – additional fees

You may have a number of quotes for invoice finance solutions from different lenders and they all look quite similar. You have a service fee and discount charge and possibly some set up costs…but how many provide you with a list of ALL of their additional charges?
These disbursements can impact your business drastically. For example, if you are used to drawing down money from the bank every day for free but then find out you will be charged each time you want to do this from your invoice finance facility…well the charges could be astronomical.
If you are looking to grow quickly, say from £500k to £1m, you will most likely need an increase in the funding limit. You must check the additional fees as many invoice finance companies will charge you a percentage of the limit increase to put this in place for you.

There are always some additional fees to be charged for things which fall outside your normal facility requirements, however some providers have a list as long as your arm and others are very transparent in their costings and have just a few extras.
You need to check the small print and understand the impact of these disbursements on the overall charges of the facility.

4) Overseas debtors

Does your business rely on trading with companies overseas? If so, you may find that some invoice finance companies will restrict the level of funding they will offer. If the average debt you have outstanding to overseas customers is above 50% you may find that a standard invoice finance facility does not work for you. There are however, some lenders who are specialists in dealing with overseas debtors and should be able to provide you with the funding that you need.

It is advisable to check your customers’ country of origin too, as some providers will only fund countries within Europe or the USA and this restriction could impact your business if you are dealing outside of this geography.

5) How you invoice - staged payments, projects, applications for payment, pay-when-paid…

If your business is within a sector below, you typically have different ways of billing which can cause issues when looking for invoice finance:-

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As some of the work carried out is subject to contracts, staged payments, call off, advanced billing, project work, and applications for payment, it is often difficult to define when the service was delivered and when it will be deemed fully complete by the customer, without relying upon another stage or set of deliverables.
This poses an issue for some invoice finance companies, as they could advance funds against an invoice which will only be paid by the customer if other terms have been met.

The customer can also apply the rule of offset, meaning if they are part-way through a project and the business fails to deliver the remaining stages, they will offset paying the outstanding invoice against finding another supplier to complete the work, thus leaving the invoice finance company potentially out of pocket.

There are invoice finance companies that can be flexible with these industries and types of billing and before embarking upon a new facility, it is important to check the full details of what they will and won’t fund, and why.

If you are new to invoice finance and would like some advice, please contact us today on 020 3555 4545 and we will be more than happy to help guide you through any terms.

Alternatively, if you are already using invoice finance and would like to improve your facility with a more flexible solution, please do get in touch and speak to our friendly experts today. 

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