Invoice finance is essential for recruitment agencies making contract and/or temporary placements, as it provides advance funding to pay contractors before the client makes payment. This funding bridges the cash flow gap and prevents the agency from using its funds to pay workers.
However, when an agency engages with an invoice finance provider, the quotations often contain jargon and complex terms. These may not be fully understood and can result in unexpected additional charges after signing the agreement.
Invoice finance providers must ensure agency directors fully understand all fees before entering into an agreement. Below is a breakdown of key elements in the initial quote that should be carefully reviewed and understood:
SERVICE CHARGES AND MINIMUM FEES
Service charges are the fees applied by the invoice finance provider on the total value of invoices submitted for funding. These charges are typically calculated on the full invoice amount—including VAT—which means they are effectively 20% higher than the turnover figures shown in projections. Additionally, many invoice finance agreements include minimum fees (monthly, quarterly, or annual), which ensure the provider receives a baseline income even if the agency falls short of its projected turnover. Agencies with slow or inconsistent growth may find themselves liable for minimum fees during low-revenue months.
REFACTORING CHARGES
Refactoring charges are a legacy fee that applies when invoices remain unpaid beyond a certain period (usually 90–120 days). This fee is essentially a second service charge on the same invoice and is intended to discourage agencies from allowing debts to become overdue. However, it often penalises the agency for client non-payment, while also resulting in the removal of funding for the invoice. It is advisable to negotiate the removal of this charge when setting up the agreement.
CONTRACT LENGTH AND NOTICE PERIOD
Invoice finance providers offer varying contract lengths and notice periods—ranging from 30-day rolling agreements to fixed 24-month terms with three-month notice requirements. If an agency wishes to exit the contract early, the provider may impose an early termination fee, often based on the average service charge over the remaining contract period.
Where possible, negotiate for shorter contract terms and flexible notice periods to avoid being locked into a long-term agreement.
CONCENTRATION LIMITS
Concentration limits are imposed to ensure agencies maintain a diverse client base. These limits restrict how much of the total debtor balance can be made up by a single client. If one client represents a significant portion of the outstanding debt, the funder may withhold funding against those invoices. Before entering into an agreement, assess your aged debtor list and discuss any high-value clients with the funder to ensure appropriate concentration limits are set.
DISBURSEMENT CHARGES
Disbursement charges refer to additional fees that may be applied by the invoice finance provider. These can include renewal fees, bank transfer charges, credit limit request fees, audit fees, trust account fees, and more. Often, the full list of potential disbursement charges is not included in the initial quote. It is strongly recommended that agencies request a complete list of all applicable fees to avoid any surprises later.
MAYACHI has extensive experience in setting up invoice finance arrangements and ensures that agencies fully understand all fees and terms before any agreement is signed. We also help agencies obtain quotes from multiple providers, ensuring they receive the most competitive rates and the highest possible level of funding.
