Our latest client has drawn down on funding today.
They are a fairly new start permanent recruitment company who are looking to smooth cash flow.
We have arranged a confidential facility with a 70% prepayment.
I was reading an article in the sunday papers about an undercover journalist who had approached the high street banks with a business plan. He was requesting a £3,000 overdraft facility for a retail jewellery business.
His complaint was that all the lenders had declined the overdraft but some had offered a credit card with a £3,000 limit. He did however advise that Lloyds TSB had asked him to consider an invoice finance facility.
This is clearly inappropriate as he has a retail business selling on a cash basis to the general public.
Unfortunately, this highlights a common issue. The front line staff in many banks are not particularly well educated or well trained. However, they are targeted to sell products they simply do not understand.
Business owners can end up with facilities they do not really want or poorly structured facilities that are not fit for purpose.
Unfortunately, this can give the industry a bad name.
Well to be honest not all lenders do. The standard however does seem to be a 12 month contract with either a 3 or 6 month notice period. However, some lenders offer a 28 rolling contract and I have seen some clients sign up for a 4 year contract (not under my advice I may add!)
So why do lenders insist on a minimum contract period?
If you look at the process of setting up an invoice finance facility I am sure you can appreciate that the costs are front loaded. The costs relate to the workload of the lender. They have a sales person that will visit you and then write up a report supporting your application. They have an underwriter who will review the report and make recommendations. A surveyor will visit you and write a detailed report about your business. The sales person will review this and update their report accordingly. The underwiter will provide the final sanction. Their is the the administration involved in actually getting you set up as a client.
With all these costs being front loaded if you were a client for only a few months the lender would lose money. Their contract periods are in a way justified.
However, if they are charging you a survey fee and an arrangement fee this argument is somewhat weakened.
Smart Factoring Quotes are delighted to have assisted our newest client secure an invoice finance facility.
We have put in place a factoring facility to help a Manchester based security company with a single debtor. Before approaching Smart Factoring Quotes the business had spoken with several lenders and had not managed to find a suitable solution.
From speaking with the client it took less than 2 weeks to provide them with the funding they desperately needed to fund expansion.
If you have a similar business or a client who is struggling to raise finance please contact us today.
Minimum base rates can mean you are paying more than you expect and more than you need to…
When speaking to new clients and reviewing their existing facilities it is quite common for them not to be aware of the minimum base rate that is included in their agreement.
If you have been with a lender for some time it may shock you to learn you may not be benefiting from the low Bank of England base rate.
Some lenders have minimum base rates in the agreement as high as 8%.
It is worth reviewing your facility to ensure you have got both the best structure and also the most competitive pricing available.
Well you may think that everyone is benefiting from the current low rates. Unfortunately this is simply not the case.
If you have had a facility in place for some time it will be worth checking the small print and understanding if you have a minimum base rate in place. I know one lender who wrote to all clients advising that the minimum base rate was 5%. At the time the Bank of England base rate was 5% so nobody worried about it. However, I do wonder if they now realise that they are paying 4.5% over the Bank of England base rate plus the discounting margin added on by the lender. This is not isolated to an individual lender and is fairly common practice.
New clients may feel that they will benefit from the low base rates. Undoubtedly they will but again minimum base rates are prevalent in many agreements. A large independent has a minimum base rate of 3.5%. In fairness their own cost of funds will be higher than the Bank of England base rate so it is not all profit but it is important to be aware of what you are actually paying.
Our advice is to review any facility you have had in place for some time. When looking at alternative quotes for a new facility be sure to understand all the costs. Headline rates can be misleading!
Remember to check the minimum base rate!
Smart Factoring Quotes can help you increase your profits. How can we do this?
We can help you:
To learn more please take a look at – Increase Profits
Smart Factoring Quotes are delighted to announce the launch of our new and improved site.
Our aim has always being to be an online resource for business owners wanting to learn more about invoice finance. Our updated site is more informative and is easier to find information.
We want to empower business owners to make an informed decision.
Factoring costs can be quite difficult to understand if you do not know what to look out for. There is a page on the site advising people how best to minimise factoring costs. I thought it might be an idea to look at what fees you should be aware of when looking at setting up a factoring facility or comparing factoring quotes.
Service fee – this is usually quoted as a % fee that is applied to the gross value of each invoice. The annual cost is calculated by applying it to your gross annual turnover. If the service fee is 1% and your gross annual turnover is £1m then the service fee will be £10,000. Please be aware of minimum fees. Please also be aware that this fee will be applied to the value of the ledger at take on. Some lenders will quote a flat annual fee.
Discounting Fee – this is essentially the cost of borrowing and is quoted as a % over base rate. Please look out for what base rate is being quoted (i.e. Bank of England Base Rate or LIBOR) and please understand if their is a minimum base rate that applies.
Arrangement fees – this is a fairly new practice where lenders are charging an arrangement fee.
CHAPS fees – this is a charge for same day transfers to you from the factoring company. I have seen these range from £7.50 – £40.
Audit Fees – lenders may undertake periodic audits on your business. Some lenders offer this for free as it is covered by the service fee. Others charge seperately for the service. It is important to consider what each audit costs and what the frequency of those audits will be.
Survey Fee – some lenders will charge you for a prelend survey.
Minimum service fee – lenders will typically quote a minimum service fee. Should your turnover multiplied by the turnover not generate the minimum fee this minimum fee will be applied.
Minimum Base Rate – as mentioned above lenders will quote the discounting fee as a % above base rate. However, some lenders have a minimum base rate of say 3%. If the base rate used is below this then the minimum base rate will apply.
This is in no way an exhaustive list of fees. It is important you understand all the fees that will be applied before signing up for a factoring agreement. Ask your lender for a full list of fees/dispursements.
Selective factoring allows a business to choose which debtors to factor. They then notify all invoices for that debtor to the factoring company.
Spot factoring allows you to choose individual invoices to factor. This can be a one off invoice or a batch of invoices.
The major differences between the two are price and flexibility.
Spot factoring is very flexible and you can turn the tap on and off as you see fit. However, the interest rates can be high. Very high – 80% interest in some instances. That said if you have a short term issue and want to factor a single invoice for 30 days it could be your cheapest option.
Selective factoring requires a contract to be entered into and while you can choose the debtors you wish factor you are required to notify each invoice. The pricing structure is akin to a traditional factoring facility so if you are looking for a medium to long term solution selective factoring should be cheaper.
