Agencies that turn to the banks for invoice finance will spend a minimum of £3,000 – £15,000 just to have a facility in place.
If you intend on placing contractors you’ll need finance.
You’ll either have extremely deep pockets, or an invoice finance facility to bridge the shortfall between paying contractors on a regular cycle and being paid by clients at a later date.
Typically turning to off-the-shelf products from the banks, agencies tend to shop around for the lowest service fee with the least headache, which leads them to overlook the moving price tag of traditional financiers.
The reality is that a low service charge is the tip of the iceberg and masks a host of additional costs and minimum thresholds that can strangle an agency’s cash flow and the headroom they need to grow.
Dig a little deeper and you start uncovering:
- The cost to set up a facility
- The minimum amount you are required to borrow against invoices
- The charges to request an extension of your borrowing limits
- The associated costs and interest that are pushed under the rug
- The cost to leave
Continue digging and you unearth a web of costs for:
- Legal letters and stationery
Yes, some financiers will even charge you for the inked used to write legal letters!
Imagine it as a private club with a low membership fee. It looks great on paper until you realise that you still have to pay for entry, seating, the cloakroom, table service, to leave, and nearly break the bank buying drinks.
Traditional invoice finance base costs
On the surface, a traditional financier will present some or all of the below fees to your agency.
The initial cost to set up the facility will vary depending on the size of your book and the work involved. It can range from £500 among smaller firms up into the thousands for established agencies.
A rolling usage fee that is dependant on the level and value of invoices being sent. It’s usually taken as a fixed percentage of the projected turnover put forward in the agency’s business plan.
Bad debt protection
Financiers that lend money against your invoices need to safeguard themselves against the possibility of the invoice payee becoming insolvent or reneging on a payment.
This is almost always an additional cost, so you will want to clarify if it’s included in the service fee along with credit control, or as a stand alone cost.
Discount charge/debtor day charge/interest
It can go by several names but works the same way as bank interest usually would and is calculated as a small daily percentage of your base rate. Essentially, you’re being charged interest on the amount you borrow against your invoices.
As it’s anchored to your debtor days, an agency waiting 60 days on 3% would typically incur just over £10k in interest a year.
Agency waiting 60 days on 3% would typically incur just over £10k in interest a year.
Traditional invoice finance additional costs
Presented by traditional financiers as additional fees, the below are in fact also a requirement to access their funding.
Annual review charge
After 12 months, a number of financiers will charge agencies a continuation fee just to maintain the facility. This is typically around 1% of the assigned turnover.
Review limit increase
A lot of financiers will charge agencies just to consider extending their limits, with an additional cost for actually increasing it.
Financiers will usually charge 1 – 2% on the amount they’re increasing the facility by, and employ charges on any domestic checks they may have to pay for credit limits.
Any legal correspondence sent to clients or yourself will be billed, along with the stationary costs to write them.
if your agency goes insolvent, there will be an additional cost to collect on all the invoices from the sales ledger.
When an invoice goes unpaid for over 60 days or the agreed time limit, financiers will either shift the invoice back to the agency to chase or charge a higher cost to retrieve the late invoice.
Bear in mind that, over the 60 days, financiers that charge interest will be profiting from the money the financier has advanced to bridge the cash flow gap.
Financiers will often need to place a seal of approval over an agency’s financial security and their intentions for the funds before lending to them.
An audit will usually cost around £500, with further costs for every client that requests written proof of the inspection
If you have international clients, you can pay varying costs on credit checks and controls that are incurred. Traditional financiers are often deeply reluctant to fund internationally as they are heavily risk-averse.
Same-day transfer charge
Financiers will charge a fast track payment when agencies need to respond to urgent requests from candidates to be paid, especially if they’re outside of working hours. CHAPS payments usually cost around £16 for a financier to do themselves, so any additional cost is a profitable charge that financiers are imposing.
Amendment to security
Your agency may be required to provide additional legal security to support the facility. Traditional financiers are heavily risk averse and usually demand personal guarantees and as many safeguards, they can level on the finance.
Retrospective fee/take-on fee
An invariable cost that flies under the radar with most financiers. Agencies that are transferring their invoice debtor book from one financier to another will encounter a transfer fee to facilitate the move.
This is usually the cost of your service fee and, will be additional to the service charge you paid to your old financier.
Arrangement fee/document fee
Covers the cost of due diligence on your clients and can vary depending on the level of investigation needed.
Some financiers may waive its enforcement, whilst others can insist on a cost anywhere from £250 to £5,000.
Financiers will usually charge 1 – 2% on the amount they’re increasing the facility by.
Traditional invoice finance additional charges
Additional charges cover everything from not using their funding to moving financiers, restricting the direction your business wants to go in.
Minimum usage charge/ non-utilisation fee
On top of paying to set up and being charged for its upkeep, you can also encounter a charge for not meeting the minimum amount you must fund.
Regardless of its use, or no use at all, agencies will usually pay between £3-15k a year as a minimum threshold.
For every infringement of your arrangement, there will be a standard charge. This could be anything from failing to fund all your clients through the financier to incorrect payments, using other financiers, or improper use of the money drawn down to pay contractors.
Personal guarantee liability
Most financiers will force agencies to submit a personal guarantee against the money they’re borrowing. This is usually up to 20% of the finance borrowed that individuals are personally liable to cover. This ties your personal finances into the fate of the company and carries some risk.
Early exit charge
The majority of financiers will have a minimum notice period of three months to a year, with a charge for early exits.
This is usually calculated one of two ways; they can either take the average amount your agency is advanced per month and pro rata that for the rest of your minimum contract, or, charge your minimum usage fee for the year.
Traditional financiers will usually opt for whichever amounts to more, but as with any negotiation, there’s wiggle room.
Unassigned invoices charge
For every invoice that is left unassigned, traditional financiers will charge you.
Transaction handling charge
Customer payments made by credit and debit cards incur a charge.