What Pitfalls are there with Invoice Discounting?

Service Charge - This is levied on turnover, including VAT. Many Invoice Discounters do not make this Service Charge clear on their website and literature.

Minimum Charges - 0.3% of a £200/£300,000 turnover business does not sound too bad but beware, most Invoice Discounters have a minimum charge of at least £8,000.Fortunately, we know the Invoice Discounters who specialise in the SME market and they have much lower minimum fees.

Advance Levels - You should not believe what the glossy brochures tell you, advance levels up to 90% are the exception, not the rule. Invoice Discounters conduct regular audits, during which they will look at the levels of contras', credit notes/returns and invoices over 90 days old and customers exceeding their credit limits. Once these are taken into account the true level of advance is more typically 70/75%. You need to be realistic about this. Some Invoice Discounters however, do not apply credit limits at all, potentially releasing 10-20% higher funding than other Invoice Discounters and we can point you in the right direction.

Minimal Annual Fee (MAF) - A relatively new innovation in the Invoice Discounting industry, the use of Minimal Annual Fee's has increased rapidly in recent years. Typically, a minimum of one year is stipulated but we have seen agreement's spanning two and three years. An initial one-year period is not unacceptable with three months notice thereafter, but make sure the break fee is pro-rata after the initial period. Better still, let us help you find an Invoice Discounter that will accept three or six month's notice from day one.

Excessive Break Fees - Not content with tying clients in for extensive periods, Invoice Discounters will also often establish a lending limit up to twice the level of that needed, i.e., £10m when £5m is more that enough. Needless to say, the break fee is based on the higher of the two figures.

Concentrations Levels - Most Invoice Discounting companies like to see a wide spread of customers, with no one customer representing more than 30% of turnover. If this happens they will disallow the excess with, potentially, disastrous consequences for your cash flow.

This is not much help to new start-ups with few customers or growing young companies looking to take on all the business they can.

Fortunately, there are a number of Invoice Discounters that will happily accept concentration levels of 100% and we can put you in touch with them.

High Export Content - As with concentration levels, many Invoice Discounting companies are not comfortable with an export level of more than 20-25%. Others will not fund exports at all. Thankfully there are a number of market specialists who are geared up to accept export levels of 70-80% and up to 100%, where appropriate. Again, we will introduce them to you.

Miscellaneous Charges - These include quarterly audit charges, electronic transfer fees, bank charges and re-invoicing fees. You need to check all of these out carefully before signing any Invoice Discounting agreement.

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