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Invoice finance is now being offered by Investec Capital Solutions. This is after Investec Bank acquired Amicus Commercial Finance from the Amicus Group. Amicus had failed to secure a banking license as expected. As a result, Amicus undertook a strategic review across the group in order to reduce operational costs and ensure that its core short-term property lending business continued to grow. The sale of the invoice finance side of the business was after this failure. It must have been unsettling for staff and clients alike given that Amicus Commercial Finance was only established in 2015.
Invoice finance is typically provided by way of invoice discounting or factoring. It allows a business to access up to 100% of the gross value of outstanding invoices. It is a great source of working capital and smooths cash flow so you don’t need to worry about when customers pay late.
When considering which invoice finance provider to use you should consider 4 main areas:
1. Structure – if the facility is not structured properly it will not generate the cash you expect it to.
2. Pricing – the difference between the most expensive solution and the cheapest can be dramatic. It is also important to look beyond headline rates and consider total costs.
3. Service levels – they way you are treated by a lender is important. You are paying for a service and you deserve the best. Things such as stability, staff turnover and general attitude of the lender can make a big difference.
4. Security – ensure you understand what your liabilties are in terms of security requirements.
If you are looking for a factoring or invoice discounting facility why not undertake a complete market review using the simple 3 step form above. That way you can secure the most competitive terms in the market. Whatever your situation there is likely to be a lender that will meet your needs better than other invoice finance providers.
By using our expertise you can ensure not only that you get the best rates but also the best structure.
Are you paying more than you think for your borrowing?
With record low base rates borrowers should be benefitting. In many cases invoice finance clients are not. Some agreements have a minimum base rate or minimum discounting fee. This means that you could be paying more than you think for the money your borrow.
Close Brothers Invoice Finance Example:
The Bank of England base rate is currently 0.25%. We recently reviewed a facility for a Close Brothers Invoice Finance client whose agreement stated they were paying 2.50% over base rate. Sadly they had a minimum discounting fee of 4% in the agreement. This meant that the client had not benefitted from the record low base rates. Had they been paying 2.50% over bank base rate the discounting fee would have been 2.75% in total. The client was paying 4% so in effect 3.75% over base rate rather than the expected 2.50% over base rate.
We have recently put agreements in place where the discounting fee is 1.70% over bank base rate so in effect 1.95%. In comparison, the 4% fee from Close Brothers in the example above does look expensive.
If you have an invoice finance facility it is worth checking the smallprint to ensure you are not paying more than you think. If you would like a full review please contact Funding Solutions on 0845 251 4040. In recent reviews for clients we have reduced costs by 58% and removed frustrating restrictions.
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.
Read Full ArticleThe 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.
Read Full ArticleRecently 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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