Invoice finance is a core funding solution within the recruitment industry, particularly for agencies operating in the contract and temporary space, where candidates are often paid before clients settle their invoices.
However, when reviewing a proposal from an invoice finance provider, agencies are often faced with complex terminology. Understanding these terms is essential before committing to a facility.
Below are some of the most common terms, along with an explanation of what they actually mean:
PREPAYMENT PERCENTAGE
This is the percentage of an invoice that the finance provider will advance to your agency upfront.
For contract and temporary placements, this is typically between 75–90% of the invoice value. For permanent placements, it is usually lower, around 50–65%.
The remaining balance (minus fees) is released once the client pays the invoice.
SERVICE CHARGE
The service charge is the fee for providing the invoice finance facility. It is usually structured as either:
- A percentage of invoice turnover, or
- A fixed monthly fee
This charge is agreed at the outset and is typically based on projected turnover and the profile of your client base.
MINIMUM FEES
Many providers include a minimum fee alongside the service charge.
This guarantees the lender a minimum level of income over a set period (monthly, quarterly, or annually). If your agency meets or exceeds projected turnover, this isn’t an issue. However, if you fall short, you may end up paying a higher effective service charge than expected.
BAD-DEBT PROTECTION
Bad debt protection is a limited form of credit insurance that covers unpaid invoices if a client becomes insolvent. Typically, this covers up to 90% of the outstanding debt, provided the client has passed a credit check. It is usually charged as a percentage of invoice value and does not typically carry a minimum fee.
For agencies with turnover below £4m, this can be sufficient. Beyond that, it’s often worth exploring a standalone credit insurance policy via a specialist broker for broader protection
DISCOUNT RATE/MARGIN
This is the interest charged on the funds advanced to your agency.
It is usually expressed as a margin above the Bank of England base rate, meaning it can fluctuate over time.
The total cost depends on how long you draw funds for. Efficient back-office processes such as prompt invoicing and collections, can help keep this cost down.
CONCENTRATION LIMITS
Concentration limits restrict how much exposure the finance provider is willing to take on a single client or within certain markets (such as overseas debt).
These limits are designed to manage risk and ensure your debtor book is not overly reliant on one source of income.
ALL-ASSET DEBENTURE
As part of setting up a facility, the lender will usually register an all-asset debenture with Companies House. This gives the lender a legal charge over your business assets, particularly your debtor bookmand ensures they have first claim on those assets if the business enters administration or liquidation..
PERSONAL GUARANTEE
Many lenders will require a personal guarantee from directors or shareholders. This means that if the business fails and there is a shortfall after debt recovery, the individuals involved may be personally liable for the remaining balance.
It’s a serious commitment and should be fully understood before signing.
DISBURSEMENTS
Disbursements are additional costs associated with the facility. These can include:
- Setup fees
- Legal costs
- Bank charges
- Collection fees
These should be clearly outlined in your agreement, so you understand the full cost beyond service charges and interest..
At MAYACHI, we specialise in helping recruitment agencies secure the right funding solutions for their business. We provide clear, practical advice to ensure you understand the terms, avoid hidden pitfalls, and choose a facility that supports your long-term growth.
Whether you’re setting up a new facility or reviewing an existing one, we’re here to help ensure your funding works for you and not against you.
