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• 19 Oct

  Invoice Finance Without A Minimum Base Rate

  

  Watch out for invoice finance offers that include a minimum base rate.

  We have just come across another example of a client having been offered an invoice finance quote (from elsewhere) with a minimum base rate written into the agreement. Most invoice finance companies offer invoice finance without a minimum base rate.

  Below I will explain the issue and the amount of extra cost that you could incur as a result.

  Invoice Finance With A Minimum Base Rate

  There are normally three components to invoice finance charges:

  • Service charge (often a percentage of invoices submitted).
  • Discount charge (a percentage over base rate charged against funds in use).
  • Other fees (ancillary charges e.g. for over payments).

  For more about how invoice finance charges work, see our detailed article.

  Discount Charge

  The discount charge element is normally made up of a margin charged over either base rate or LIBOR. The rate will depend upon the size of your business, risk factors and the amount that you are borrowing. For example this could be 2.5% over base rate. At the present time the UK base rate is 0.1%. So the total charge would be 2.6% each year.

  Most funders work out that daily rate to apply the discount charge (Note: not all work in the same way). For example:

  • £100,000 of funding drawn down.
  • 2.6% (which is the 2.5% over base rate of 0.1%) per annum = £2,600 per annum.
  • Daily rate = £2,600 / 365 days = £7.123 per day (I've rounded to keep the maths simple!).
  • So say 30 days discount charge would be: £216.69 (which is £7.123 x 30 days).

  Minimum Base Rate

  If you have an invoice finance facility with a minimum base rate, you pay that minimum even if base rate falls below that level. For example, in the case mentioned above, the minimum base rate was 1.25%. This means that with base rate being 0.1% currently, you would still pay the margin over 1.25%.

  In the worked example above, it would mean the following:

  • £100,000 of funding drawn down.
  • 3.75% (which is the 2.5% over base rate of 2.25%) per annum = £3,750 per annum.
  • Daily rate = £3,750 / 365 days = £10.274 per day (I've rounded again).
  • So say 30 days discount charge would be: £308.11 (which is £10.274 x 30 days).

  Minimum Base Rate = £1,150 Extra Per Year

  So in a year, you would end up paying £1,150 extra (in the example above) if your agreement had that minimum base rate provision included, when compared with a facility with no minimum base rate.

  By Glenn Blackman