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Published on 1 March 2011by Tony Groom

Factoring and Invoice Discounting: Be Wary of Hidden Fees

Factoring and invoice discounting (borrowing money against invoices) can be a

helpful tool for funding the working capital of a business.

While it used to be regarded as a means of borrowing by businesses in financial

difficulties, it is now a common source of finance for managing cash flow and has

the additional benefit of imposing discipline on the collection of outstanding sales

invoices.

The service charge fee is pre-agreed with the finance provider and generally relates

to the level of service provided which could include the collection of book debts

and different levels of underwriting risk of bad debts. In addition the client is made

aware of any arrangement fees and that interest on funds drawn is also applied.

Other considerations that may be taken into account when fixing the service charge

fee include volume of invoices, value of invoices, percentage drawn down,

maximum amount borrowed, the level of monitoring necessary and whether all or

only part of the sales ledger is assigned.

The service charge fees for factoring are generally at a higher rate of between 0.8%

and 3%, than for invoice discounting because the factoring service charge includes

debt collection. Invoice discounting is generally cheaper because the company

collects its own invoices.

However, a number of other fees are also included in the finance document and

these have become a great source of revenue for lenders. Hidden in the small print,

contingency fees are included that can be triggered by a default. These fees are

sufficiently large to justify some lenders looking for reasons to trigger them.

K2 Business Rescue The Emergency Service for Business

Call Tony Groom on 0844 8040 540

There are many examples of companies in financial difficulties where the factor or

invoice discount provider pull the plug on a facility and collects in the outstanding

debts to recover funds loaned as well as their retaining the default and recovery

fees.

Typical fees that might be applied are a default fee of 10% of the ledger held plus

recovery fees which are generally not specified. Such is the scope for earning fees

that advisers to lenders might be persuaded to recommend the exercising of rights

under a default knowing that they, as advisers, can be paid out of the recovery fee

clause as well as repaying their lender client the loan and default fee.

Turnaround advisers often find themselves having to negotiate on behalf of

companies with factors and invoice discounters to persuade them not to pull the

plug when, although the money loaned is covered, the real reason is to trigger

default fees.

Such self interested behaviour may swell the coffers of lenders but it doesn’t help

preserve businesses or improve the reputation of the finance community.

We are not Insolvency Practitioners. We operate within the law to protect our clients and their wealth. Our team has worked for over 20 years to help stabilise and return hundreds of businesses to profitable growth. Once appointed, Insolvency Practitioners do not work for you, they work for creditors and use your company’s assets to pay themselves. We work for you, not creditors.

More Free Resources for Directors and Business Owners in Difficulty www.rescue.co.uk

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