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Costs

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.

 

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.

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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Factoring fees can be a significant cost for any business and as such it is important to reduce factoring costs wherever possible. We have a few tips to help you:

Review your facility – it is important to reciew your facility on a regular basis both with your own factoring company and with the market. As your business grows or changes it may well mean that your business qualifies for better rates. Typically the higher your turnover the lower the percentage service fee you will pay. Often businesses that experience rapid growth fail to review their facility and as such are paying a lot more than they need to. I recently spoke with a business whose turnover had tripled since they set up their facility. As a result we more than halved their total fees. Importantly the market also changes and as such better or more suitable products become available that may be more cost effective. If you want a full review of the market to see what savings you can make please contact the team at Smart Factoring Quotes today.

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