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Complaints

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.

Factoring Rates can differ dramatically from lender to lender. We will have a look at what variables impact on the pricing of a factoring facility and then we will look at why some factoring companies are more expensive than others.

What impacts on the service fee?

The service fee is what the lender charges for administering your facility and it is typically determined by workload. This is dictated by the number of debtors you have an also the number of invoices you issue. Turnover also has a huge impact on your service fee and typically the higher your turnover the lower the percentage service fee.

The discounting fee, what impacts on this?

This is the cost of borrowing and it should reflect the risk the company is taking. The total fee is made up of the base rate and the margin. Some lenders use the Bank of England base rate while others use LIBOR. Watch out also for the minimum  base rates which a lot of lenders put in place. The margin is often dictated by their credit policies and with negotiation can often be reduced.

These are the 2 main fees but it is important to be aware of additional fees and charges. Always consider total costs when looking at different offers. Please also consider what service is actually on offer and ensure it meets the needs of your business. Factoring rates are obviously important but so are service levels and facility structure.

We often receive inquiries from clients who are keen to transfer from one lender to another because the credit control is poor.

I am afraid to say that often the provider accused of providing a poor service is a bank owned factoring company. However, when we ask how the factoring company was chosen there is also a common theme. They were either chosen because that is who the business banks with so it was a default choice or because they were the cheapest.

Without going to the market it is almost impossible to understand what your options are. If you don’t understand what your options are then how can you make an informed decision?

If you have chosen the very cheapest option then are you really surprised that the service does not quite meet your expectations? Would you expect free champagne on an Easyjet flight or free home installation from Ikea. No, of course you wouldn’t.

Typically with credit control from a factoring company you will get what you pay for. The larger bank owned factors will typically fully automate their credit control and it will be done by automated letters and month end statements. They may call your largest debtors but it will be a hands off approach.

Other factoring companies will provide a hands on credit control service where they call each debtor and have open communication with you the client. This however is time consuming and as such the cost for such a service is more expensive.

When choosing a factoring facility it is important to understand what level of service you expect and choose a lender accordingly.

There seem to be several invoice finance brokerages appearing that are linked to insolvency practitioners. Only today I was asked by a client of mine why this was so I thought a post may be due on the topic.

In short the insolvency practitioners see the invoice finance leads that give to lenders as a carrot to attract insolvency work from the lenders. In fact some of the IP owned brokers will only give leads to lenders if they give them insolvency work in return. I have seen some e-mail marketing from one such broker offering 2 new deals to a lender in return for a ‘fee generative appointment’.

Reciprocity is a buzz word in many industries these days and the invoice finance industry is no different.

However, in my opinion it does raise concerns for business owners who approach these brokerages looking for independent and impartial advice about factoring or invoice discounting. There is every chance that the business will simply be placed with the lender that they ‘owe’ a deal to. If this is the case it means that they are not really acting in the best interests of that client.

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.

Factoring agreements are typically for 12 month periods with either a 3 month or 6 month notice period.

However, there are companies offering factoring with no minimum contract.

You could opt for a trial period, a rolling 28 contract or a rolling 3 month contract. Smart Factoring Quotes can help you access all these types of agreements.We will also explain in full the fee structure so you have a full understanding of what you will be paying.

We understand the invoice factoring market and all that it can offer. We also understand the frustrations that businesses face when looking to set up these agreements. We understand how to get you the invoice finance facility that you want.

As an invoice finance broker I speak with a lot of businesses who are looking for cash flow solutions for their businesses.

It would be fair to say that their is a real mixed reaction towards invoice finance and especially factoring. A lot of this relates to the perception that factoring is a last resort and I would argue that this is certainly no longer the case.

However, having read various posts on several forums their seem to be some common complaints about factoring companies. These include hidden costs, actual prepayment not been as high as quoted headline rate, reserves and retentions, lengthy contract periods and poor service levels. Unfortunately in a lot of cases I feel that this business owners do have a valid case.

Another area that received a lot of publicity on the FSB forums is the hefty collect out fees and early termination fees that can be levied by lenders. These can often be totally out of sync with the work load required to collect in any outstanding debts and many view these charges as opportunistic.

If you have any valid complaints and you wish to air these experiences we will accept posts on this forum – please use the comment box below. However, we will not allow “witch hunts” so please do not name individuals and please try to stick to the facts.

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