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Favell Recruitment are a family owned business started by brother and sister Oliver and Alicia Favell. They are a recruitment company based in South Yorkshire that specialise in the construction sector.

The business started trading in 2014 and to finance it’s rapid growth they entered into an invoice finance facility with Aldermore Bank Plc. They set this up on a the Aldermore ABC product which is a fixed price facility and they had an overall credit facility of £50,000. Sadly, the facility did not generate the required working capital but when they looked to terminate the agreement Aldermore levied early termination fees.

Problems

The facility had run satisfactorily but they soon outgrew the facility. In order to double the facility limit to £100,000 Aldermore doubled their fee structure to £900 per month plus an additional 0.65% of turnover for bad debt protection. The facility was also restrictive as there was a 50% concentration limit on the facility and their top customer could represent more than 50% of their sales ledger. This put pressure in Favell’s cash flow as the facility was not generating the required cash.

Favell Recruitment felt that the facility was both restrictive and expensive. As a result Oliver looked to source a better structured facility. A facility was sourced from another lender that provided an increased facility limit, increased prepayment, increased concentration limit, full funding limits on all their debtors and also provided considerable savings.

Cost Comparison

Lender                                                        Aldermore                                         New Lender
Facility Limit                                            £100,000                                            £200,000
Prepayment                                              85%                                                      90%
Concentration Limit                              50%                                                      100%
Service Fee                                              £900 flat fee                                       1%
Bad debt protection                               0.65% of gross turnover                  Included in service fee
Discounting Fee                                     Included in flat fee                            2.5% over bank base rate

In terms of costs, if we analyse the fees paid by Favell to Aldermore in December we can see that despite borrowing just over £7,000 at the end of December having notified just £23,164 of invoices the fees for the month were £1,230.16. Of this, £900 was fixed cost service fee which represents 3.88% of turnover and this did not include the bad debt protection.
If the new lenders facility had been in place the costs would have been circa £450. This is a reduction of over 60% in costs. Due to the inflexible fixed fee arrangement and the low turnover in December due to the slowdown in the construction industry this may be somewhat skewed. However, the service fee element would have been just £231 compared to £900 and the additional bad debt protection.

If we assume a turnover of £700,000 and average borrowing of £75,000 the Aldermore facility would cost £16,260 versus the new facility of £10,650. Again a considerable saving of 35%.

Termination Penalties

Favell Recruitment approached Aldermore to advise that they wanted to leave. Sadly, despite the facility being restrictive and expensive Aldermore advised that there would be a termination fee.
Aldermore are members of the Asset Based Finance Association (ABFA) and on Aldermore’s own website they state that “as members of ABFA we take these commitments seriously and are dedicated to ensuring they are RESPECTED at all times.”

If you look at the ABFA Code of Conduct and more specifically the ‘Guidance to the ABFA Code’ it states:

“3.2.3 Where a client requests termination of a facility without the required or any period of notice, even though Members may not have any legal obligation to agree, they are encouraged to give reasonable consideration to such request, particularly where continuation of the facility may cause hardship to the client.”

There is obviously no legal requirement for Aldermore or any other ABFA member to allow a client to terminate a contract early. However, given that Aldermore could not fully fund Favell’s largest customer due to concentration restrictions, it could be interpreted that “continuation of the facility may cause hardship to the client” given that it was restricting profitable trading and growth with their largest customer.

Due to the restrictions on the facility and also what Oliver considered to be excessive fees, Favell Recruitment felt they had no option but to pay the termination fee to Aldermore to exit the facility.
Oliver Favell commented, “This is not a good way to do business especially after it appears they were overcharging us. We were paying a lot of money for a restrictive facility with a £100,000 limit and now we are paying considerably less for a £200,000 facility. All in all I would not recomend Aldermore to anyone ”

With a better structured and more cost effective working capital facility we wish Favell Recruitment continued growth and success.

Do you want to access invoice discounting but don’t want to provide a personal guarantee?

Invoice finance without a personal guarantee is available. You can contact Funding Solutions on 0845 251 4040

Many invoice finance providers insist upon a personal guarantee and others only insist upon a guarantee if you are factoring. This seems strange to me as the lenders risk associated with invoice discounting is higher than it is with factoring. However, the criteria for invoice discounting with these lenders if far more stringent so the personal guarantee is less important.

Why do lenders look for a personal guarantee?

A typical requirement for a personal guarantee will be between 10-25% of the overall funding line while some lenders will look for unlimited personal guarantees in the first instance.

The reason lenders look for a personal guarantee is to keep the directors interested in a failed situation. If a guarantor stands to lose money under a guarantee they will help the lender collect in outstanding debts. It may mean they need to dig out a proof of delivery or a signed timesheet to help resolve a dispute.

Are personal guarantees called upon?

Rarely are personal guarantees called upon. Invoice finance lenders are lending against outstanding invoices and their calculation of prepayment relates to what they feel they will be able to collect out in a failed situation. On that basis the outstanding debt is repaid by collecting out what is owed by customers. This can be a troublesome process so the directors or guarantors help is often vital and as already stressed the guarantee is there to keep them interested in assisting.

In fairness banks and other lenders are becoming far less reliant on personal guarantees than they used to. Mostly due to reputational risk, especially where the family home is the main asset underpinning a guarantee.

So do I have to provide a guarantee?

In short no. There are lenders available who will provide funding without a personal guarantee.

Shop around or use a reputable broker such as Funding Solutions.

There are more and more lenders entering the market of constrction factoring. This should be good news for construction companies and it may well be, however, there are some real potential pitfalls for companies that use this form of finance.

For many construction contractors this form of finance may present a real lifeline and an opportunity to finance growth but it is imperative that you understand how it works and how charges can mount.

One frustration I have is that businesses who are on the fringe of the construction industry can be assisted by more traditional factoring providers. Unfortunately lenders with specialist construction factoring products will ‘force’ these businesses down this route as it reduces their risk, reduces their exposure, increases their fees and ultimately provides a better return for their shareholders. There seems to be little benefit for the business that is ‘forced’ down this route.

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The permanent recruitment sector has historically been neglected by the invoice finance industry. There was a time when the industry would not finance perm recruitment companies.

So why was the perm recruitment industry neglected?

It was neglected because of the perceived risk involved in dealing with invoices that related to permanent placements. With temporary recruitment the rates are agreed, work is completed, timesheets are signed and invoices are raised. If the hours are multiplied by the agreed rates correctly there is very little that can be queried. In comparison, an invoice for a perm placement is raised when the candidate starts work and sometime before they have even started. What happens if the candidate does not show up on the first day? What happens if they walk out after their first week? What happens if the company finds they are not suitable and let’s the candidate go? Typically there are various rebates due depending on when they part company. As such there is no guarantee that invoices raised will be settled in full if at all.

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Recently we were approached by a landscape gardener than needed assistance in raising some working capital. The family owned business has issues as they were working for the well known house builders. These clients would take a long time to pay and in the meantime they had to pay their workers weekly.

They had approached their own bank who were unable or unwilling to provide an overdraft facility. They referred them to their invoice finance arm who were unwilling to assist as the business was considered to be in the construction industry as they were required to submit applications for payment to the house builders like any other contractor. From there they had approached several independent invoice finance providers who were unwilling to help for the same reasons. The landscape gardener then approached us at Funding Solutions UK.

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Arrangement fees for factoring have crept into the industry in recent years. If you look back at historical comparisons between invoice factoring and overdrafts they would typically say that arrangement fees were payable on an overdraft facility and not on an invoice factoring facility. However, this is no longer the case. Some lenders charge an arrangement fee, a legal documentation fee and a ‘take-on’ fee. The take on fee is the service charge applied to the debts in existence when the facility commences. For example, if you have a debtor book of £500,000 and a service fee of 1% then the take on fee will be £5,000 on day one. Add to this the arrangement fee and legal documentation fee and the first day of your factoring facility is an expensive day at the office!!

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The best factoring company for your business will depend on the unique characteristics of your business and importantly on your own requirement.

The main aspect of any factoring companies proposition is the structure of their facility, service levels and pricing.

Structure of a facility

It is imperative that the facility is structured to meet the needs of your business but some lenders may not be able to structure a facility to meet your needs. Some lenders have a credit policy that will not allow them to finance any debtor that exceeds over 25% of your total ledger. If you have one large customer that accounts for a large proportion of your sales ledger or all of your sales ledger such a lender would prove to be restrictive. You will need a lender that does not have such stringent criteria when it comes to concentration limits. Another example can be exports. Some lenders will simply not finance export sales so if you have export sales or are looking at export sales than you need to consider a lender that can finance those sales. Smart Factoring Quotes understand the capabilities and requirements of each lender in the market.

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If you are looking to finance a recruitment business you are in luck as there are several options open to you especially if you are providing contractors or temps that complete time sheets. That said, if you are a permanent recruitment company there are also several options that are available to you.

If you are a recruitment company thatis paying wages weekly against signed time sheets there is a good chance your clients are only paying you monthly at best. Recruitment businesses or notoriously cash negative for this very reason and if you have a fast growing recruitment business this problem is only compounded.

So what finance solutions are available to you?

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