Invoice finance is a common requirement for recruitment agencies engaged in contract and/or temporary placements. It bridges the funding gap between the candidate’s payment and the client’s settlement of the invoice.
However, the terminology used within an invoice finance quotation or agreement can often be complex and, at times, confusing. It is, therefore, essential to ensure that each term is fully understood before signing up for a long-term agreement.
Outlined below are several key terms frequently found in invoice finance agreements and documentation that agency directors should be familiar with:
SERVICE CHARGES
Service Charges are the fees charged by the invoice finance company, based on the full invoice and credit note value uploaded to their system. This fee gives the agency access to borrow money against its sales invoices. This fee is typically a percentage of turnover, but it can also be a fixed monthly fee. The fee is agreed at the start of the agreement and is based on projected turnover, industry and client risk, but can be reduced as the business turnover grows.
MINIMUM FEES
When an invoice finance provider agrees on funding terms with an agency, they will include a minimum fee to secure the anticipated revenue. This may be presented as a monthly, quarterly or even annual minimum fee. Should the agency exceed the minimum, no further charges apply. However, if an agency generates less than the agreed amount, then the invoice finance provider will charge the difference to meet the minimum fee.
DISCOUNT RATE
The discount rate is the interest rate charged by the invoice finance provider above the Bank of England base rate for any borrowed funds. This rate is agreed at the outset and is calculated as a daily interest rate based on the amount borrowed each day.
PREPAYMENT PERCENTAGE
The prepayment percentage refers to the proportion of the sales invoice or sales ledger that the invoice finance company will advance to the agency. This typically ranges between 70–90%, depending on the provider’s risk assessment. It should offer sufficient funding to pay the candidate before the client settles the invoice.
BAD DEBT PROTECTION / CREDIT PROTECTION
Bad Debt Protection, or Credit Protection, is an insurance premium charged by the invoice finance provider in case a client becomes insolvent. This is often a percentage of the invoice value and is based on the client’s credit rating. If a client has an acceptable credit rating, the agency should be covered for the funds advanced by the invoice finance provider.
REFACTORING CHARGES
Refactoring charges are additional fees imposed by some invoice finance providers if a client fails to pay within 90–120 days. These charges act as a penalty to the agency for continuing to borrow against overdue invoices beyond the agreed terms.
CONCENTRATION LIMITS
Concentration limits are imposed to ensure that agencies are not ‘putting all their eggs in one basket’ and are overly reliant on a single client. These limits may be based on the percentage of total outstanding debt attributed to one client or by the concentration of export debt on the ledger. If a client has a sufficient Bad Debt Protection limit, many invoice finance providers may waive these restrictions.
MAYACHI has set up many invoice finance arrangements over the years, ensuring that each agency fully understands the terminology before entering into any agreement. MAYACHI is registered with multiple invoice finance providers to ensure that each agency receives the best deal possible that will provide the maximum funding required to support their business growth.
