Five headaches of invoice discounting
It’s well known that running a contract business requires access to a large amount of money to make sure contractors get paid on time.
Traditionally recruitment agencies have had two main ways to finance their contractors; either do it themselves using their own funds or by making use of invoice finance.
There are a number of different ways invoices can be financed but one of the most popular methods is invoice discounting. Invoice discounting is available to agencies with turnovers in excess of £250k+ and allows recruiters to release up to 90% of the value of their invoices thus providing the funding needed to operate a contract business.
While this works well, there are a number of potential headaches invoice discounting can cause:
1 – Not a complete solution
As well as money, each contractor or temp will require some sort of administration. From raising contracts through to approving timesheets and, most importantly, collecting payments, somebody will need to take responsibility.
With invoice discounting, this responsibility is down to you. Everything from timesheets through to credit control is your responsibility. Your finance provider is just that, a provider of finance.
Putting in place the processes to deal with this can add further costs to the process and squeeze the margins you have worked hard to put in place. Furthermore, any clients with long payment terms or who are late payers will cost you more money as you will need to draw down more money to cover payments.
Finally, many invoice discounting products have not been designed for the unique nature of the recruitment industry.
2 – Leaving is not easy
The time may come when you decide to take your financing completely in-house or change from your provider. Sounds straightforward but typically can take months of negotiation to secure your exit and can often mean your draw down facility is removed during your notice period leaving you to continue funding your contract book.
To help you avoid paying unnecessary fees or get caught in exit traps, we’ve listed 21 invoice finance costs you can avoid here
3 – Confusing language
One of the common complaints we hear is that the language used by finance providers is confusing at best. The finance industry has a bit of a reputation for using words and acronyms very few people outside of the industry know or understand. Getting you head around these can also be a little daunting as the explanations often use even an even greater number of finance terms.
4 – Unclear pricing models
With so many variables it can be difficult to get an exact cost for financing. You may be quoted a percentage that sounds reasonable, but this is often only the tip of the iceberg. The costs normally occurred include:
- Set Up Fee – Most invoice factoring providers will charge an upfront fee just to set up your new facility. This fee will vary and can be quite substantial so it is vital you find out what this will be as soon as possible.
- Service Fee – Paid either each month or annually, the service fee is normally calculated as a percentage of your agreed annual turnover. So if you plan to turnover £700,000 and your service fee is 1%, you will pay £7,000. You will get a better rate if you agree to a higher turnover, but be careful as this may increase the minimum service fee you have to pay. Also take into account the way turnover is calculated. Factoring companies will include VAT on your turnover figure so a contract requiring £100,000 worth of finance would be subject to service fees on £120,000 which includes the VAT.
- Auditing Fees – It is fairly common for lenders to carry out an audit every 3-6 months and some of them charge you to do it.
5 – Poor customer service
Perhaps the biggest headache we found was the level of customer service received once signed up. Poor support, lack of communication and an inability to react to individual business needs were the main three complaints.
This article was originally published on June 18, 2014 and updated May 16, 2019