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.

You are here

Our Partners

Bibby Financial Services
Skipton Business Finance
Metro Bank
Close Brothers Invoice Finance
Ultimate Finance Group
Ashley Business Finance
Shawbrook Business Credit
Factor 21
Working Capital Partners
Catalyst Finance
Market Invoice
Platform Black