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Stories Tagged ‘Collect Out Fees’

As an invoice finance broker it is interesting to hear the complaints I hear from clients about invoice finance companies. Some I may add are totally unfounded and relate to the invoice finance company not agreeing to an overpayment or something that they shouldn’t have to do. However, some seem to follow a common theme and these were highlighted in a forum by the Federation for Small Business.

I want to explore some of the themes that were raised:

  • Hidden costs and unexpected fees – it would be fair to say that not all invoice finance companies are as transparent as they could be in relation to fees. We often see agreements where a minimum base rate is hidden in the small prints. Lists of dispursements are also rarely shared at first meetings which makes comparison of facilities almost impossible. On that basis headline rates can be misleading as some companies have virtually no additional fees.
  • Restrictions on funding. I think this complaint often boils down to a lack of understanding on the clients part and poor communication from the lender. It is imperative any company entering into an invoice finance agreement understand what invoices are eligible for funding. In my mind I believe that should be explained properly by the lender at the outset.
  • Termination fees. This seems to be a thorny topic at present and relates to the fees charged should you wish to leave early. The justification of these fees relates to the fact that the costs of setting up a facility are typically incurred either at commencement or even precommencement by the invoice finance company. As such it takes the contract period to recover these costs and turn a profit. Should a client look to leave early then they incur a loss. However, fees such as arrangement fees, legal documentation fees and survey fees have crept into the industry. On that basis surely the initial set up costs are paid for by the client upfront. If this is the case I am not sure early termination fees can be justified.
  • Collect out fees. This is a fee applied to the ledger upon the failure of the business. Some lenders apply a 15% fee the gross value of the ledger when the company fails. Is this excessive? In some instances most definitely. I saw a bank (one that is now government owned) charge a collect out fee on a ledger where there was actually no borrowing. The implications to business owners is often minimal and it is creditors and often HMRC that lose out on the funds being taken. However, where there is a shortfall and a personal guarantee has been given it could cost the directors personally.

I am sure that there are more complaints from many clients but overall I would maintain that the vast majority of invoice finance clients are happy. there is obviously always room for improvement.

From my perspective it just seems a shame that the same invoice finance companies get mentioned time and again and seem to become notorious for certain practices. It can give the industry at large a bad name.

I was reading the posts on a forum hosted by the FSB about factoring and invoice discounting. As someone who is actively involved in the invoice finance industry it did make me cringe a little.

There were numerous posts from business owners and the odd person in the invoice finance industry including myself. The most passionate posts were from the owners of businesses that had got into difficulties and ultimately failed. They described how invoice finance companies had appointed advisors charging huge fees, appointed insolvency practitioners charging huge fees and/or had charged huge termination and collect out fees.

It does seem as though some invoice finance companies will levy these hefty charges when a client is in danger of failing. They are legally entitled to do so but I am not comfortable with the manner in which they do so.

The rationale behind collect out fees is to allow a lender to apply resources to effectively collect out their position. I have no issue with that. However, this fee can often be as much as 10% of the ledger value rather than the amount outstanding. In some instances the workload may well justify such a fee but these instances are few and far between. So why are lenders charging these fees? Well in short and in my opinion because they can.

The forum had some post putting the blame at the door of independent invoice finance companies which I thought was unfair. Some of them are guilty of this but not all and the banks are also actively involved in this practice.

By way of a recent example I had a client who owned a Scaffolding business and they were using invoice finance from a large bank provider. For good reasons they were restructuring and trading through a seperate limited company which in effect would be a phoenix. This had been well managed and the invoice finance facility had been run down to zero and cash was available to pay creditors. All good news and honourable. Unfortunately the bank concerned had a very black and white policy and could not finance the new company as it was technically a phoenix. As such the facility was ceasing and there was to be no ongoing relationship so the bank took advantage of the terms and conditions and charged a fee of 10% of the ledger value as a collect out fee. That resulted in a fee of £16,000 for collecting out what? Well, nothing as they had no outstanding balance. Who would have thought I had scaffolders calling bankers cowboys?!?

What is the effect on these businesses and their directors? Well in most cases I suspect the impact is nominal as any money collected in and not charged in fees would be distributed to creditors including HMRC. However, in some instances directors may well have benefited and my scaffolding client was a good example – it was money that would have ended up in their pocket. Either way I think it is morally wrong to charge for a service that has not been provided.

This practice is gaining publicity and tainting the name of a very good industry that is a valuable source of working capital for many thousands of UK businesses.