Why invoice factoring is like booking flights
Finding an invoice factoring provider is a lot like booking a flight.
The headline price says one thing but once you’ve included booking fees, seating, insurance and onboard services, you’re looking at an entirely different financial reality.
You can’t afford to gamble with your agency’s finances so, to avoid the risk, you need to understand the sum of its parts.
We’re going to have a look at some of the additional fees you might be charged when choosing an invoice factoring provider, and breakdown exactly what they mean.
Your Invoice Factoring Booking Fees
When you’re booking a flight, some fees are expected. The same kind of fees apply for most invoice factoring providers.
Here are some of the “booking fees” you might have to pay to an invoice factoring provider:
Setup costs (your booking fee)
It will be relative to the size of the funding facility you’re looking for but can stretch up into the thousands for larger firms.
It will also take you several weeks to detangle the red tape involved.
Service fee (the cost of your tickets)
This is a focal point that providers usually compete over and can mislead agencies into thinking they’re securing a better deal.
It’s a rolling monthly fee that’s usually taken as a percentage (%) of your projected turnover.
Bad debt protection (travel insurance)
Financiers need to safeguard the money they advance to you, in case your clients don’t pay.
This will usually be a stand-alone cost but can occasionally be included in the service fee.
Discount charge/Interest
In most cases you will be charged interest on the money advanced against your invoices.
This is usually calculated as a daily percentage of your base rate.
Minimum usage charge/non-utilisation fee
You will often be tied to a minimum charge regardless of whether you’re using the finance.
Financiers want to ensure they turn a profit even if your agency doesn’t.
Your Invoice Factoring Restrictions
After you’ve booked your flight, you’ll then face a number of restrictions with what you can and can’t pack, how much luggage you can take, when you can board, etc. The list of restrictions can feel endless!
And some factoring providers present similar restrictions.
A factoring provider is there to remove the work in contract management and bridge the shortfall between paying contractors and waiting on client payments. If your funding is conditional, then your cash flow is at risk and so is your business.
These are some of the restrictions you might face when using your invoice factoring provider.
Funding limits
This is the agreed borrowing limit that financiers set against your invoices.
If your sales ledger is growing faster than expected, or your business plan doesn’t justify a larger facility, then you won’t be able to access the cash flow you need.
Advance rates
How much are you allowed to draw down against your invoices?
The more you’re advanced, the faster you can recycle it into investment and growth.
Concentration limits
This is the maximum amount a financier will fund against a single client, which is expressed as a percentage of your total funding.
Are you restricted in how much funding you’re allowed to do with any one given client? Do they see risk where they could be seeing opportunity.
All-turnover agreement
Some financiers will insist that your entire debtor book is run through them.
So, you either fund all your clients through them, or none.
Your invoice factoring reservation fees
Once you’ve booked your flight and paid the standard fees, you then potentially have to pay to reserve your seats, cover your baggage allowance and order your in-flight meals.
And invoice factoring can be the same. Here’s a breakdown of the invoice factoring ‘reservation fees’ you might be expected to pay.
Annual review charge
Every 12 months, a number of invoice factoring providers will charge agencies a percentage of their assigned turnover – simply to maintain their facility.
Reviewing & extending a facility
Even looking into extending your funding facility will cost you. This is an unavoidable cost If you intend to grow.
Exit fee
Traditional financiers will ensure you pay your dues by charging an exit fee. This is the average amount your advanced each month prorated to your minimum contract.
Once you’ve given formal notice to leave, your ability to drawdown will also be clipped during the notice period.
Long contracts
Financiers can lock and bolt you in with lengthy contracts and long notice periods.
Your Invoice Factoring Onboard Costs
Once you’ve booked your tickets, taken into account the restrictions you face and have paid for your reservations, you’d like to close your wallet and relax on your journey. But that is not the reality with most flights. You then have to cough up if you want snacks, inflight entertainment or an extra pillow.
Invoice factoring can be the same and you may well encounter additional cost for any additions to the financing you receive.
Let’s take a look at some of the invoice factoring ‘onboard costs’ you might have to pay.
Re-factoring charge
Unpaid invoices that are 60-90 days after the agreed payment terms will be handed back to you, or encounter an additional cost to continue pursuing.
Providers will also accrue interest during the wait so profit from late payments regardless.
Overseas checks & Arrangement fees
This covers the cost of client due diligence and can vary depending on the levels of investigation.
Traditional financiers are also less flexible or willing to fund internationally.
Same day transfers
CHAPS payments cost around £16 for a financier to do themselves, so any additional cost is a profit.
Auditing & legal
You pick up the bill if the financier needs a seal of approval over your financial security.
In the eventuality that your agency turns insolvent, there will also be an additional cost to collect on invoices from the sales ledger.
So, What’s the Solution to Your Invoice Factoring Issues?
You may now be thinking to yourself, “Why would I use an invoice factoring provider when it costs me this much?”
Well, the good news is that there are other options out there for your recruitment business.
At Sonovate, we have created simple finance for the new working world.
What do we mean by this?
- We only charge one fee
- There are no additional charges or hidden fees
- We give you an unconditional cash flow
- We provide model that enables your recruitment agency to grow
More than this, we are different from other invoice factoring providers on the market because we marry finance and technology to deliver an unrivalled package for your business:
- Entire back-office management
- An industry-leading cloud platform
- Integrated online timesheets
- An app for your candidates and clients to easily manage the timesheets process
- A dedicated account manager
What we provide that traditional factoring providers don’t, is the financial security and confidence your business needs – for just one fee.
On top of this, we also give you unrivalled tech that removes the admin that slows you down. So you can focus on recycling your profit into bigger profits and investments.
See how we compare to other invoice factoring providers for fees, finance tech and support.
So, next time you see a cheaper headline figure – (whether that’s from an invoice factoring provider or an airline – ask what the financial reality from using them looks like?
Download our free eBook below to learn more about what to look for in an invoice factoring provider.
