An Explanation Of Invoice Finance Offer Letters
Over the past few years, the invoice finance industry has gone through a number of changes, which will benefit companies that are looking for an invoice finance facility. This has included greater transparency of charging.
However, with these changes, has come a degree of diversity as to what an invoice finance offer letter looks like.
Greater Transparency Of Charges
There has been a real move by many financiers to provide transparency when it comes to all the charges that could be incurred, but this transparency can result in a myriad of figures and fees being itemised in the offer, many of which you will never see again as they are not relevant to your particular product offer.
Fee Differences
In addition, there are fees that are similar but given different names by different providers. An example would be the service fee, also called the administration fee, or factoring fee, depending upon which factoring company provides the offer.
Single Or Bundled Fees
You may have an offer from two providers, offering the same product, but with a completely different charging structure. In some cases, the fees are itemised, service charge and discount charge. In other cases, some providers only charge a “single fee” also known as a "bundled fee".
Understanding Invoice Finance Offer Letters
For these reasons, the following suggestions may prove useful to you when looking for the key points within a letter of offer and comparing offers:
- Which Product - Understand exactly what type of product you are being offered (regardless of what you have requested). Offers relating to CHOCS (Client Handles Own Collections Service), ID (Invoice Discounting) should typically have a lower service fee, based on the same turnover, than the service fee offered for recourse or non-recourse (with debtor protection) factoring. This is because the responsibility, and of course cost, for chasing your customers rest with you in the case of the two former options.
- Service Levels - Even with the same product description you will find a different level of service provided. For example, with the product “Recourse Factoring” you will find that some providers will only chase a small portion of your customers (most likely your top 5-10 customers) whereas other providers will chase all your customers, and provide a comprehensive credit control service. Quiz your provider on this, especially if the service fee rates are similar between offers, as you will clearly get greater value for money with the one who fully chases all your customers.
- Single Fee versus Dual Fee – The single fee “Offer” has become more common over the last 2-3 years and has been introduced to provide clients with a simpler, more transparent fee structure. However, this can come at a cost, as some providers do charge a premium for offering a single fee deal. Hence, it is important to assess what the actual cost is before committing, particularly if you have a traditional dual fee offer against which to compare.
- Irrelevant Charges - Assess relevant and irrelevant charges and fees - within an “Offer” to establish what exactly you are going to be charged, and when. This may sound obvious but we have seen offer letters which actually offer a client a very good deal, but due to poorly designed letter, the client couldn’t see the “wood for the trees” and perceived the offer as expensive.
- No Minimum Fees – There are now a growing number of providers that offer deals without any minimum fees attached. For more established businesses this is perhaps not as attractive as for the smaller companies who can’t always guarantee the required level of turnover will be put through the facility during a specified period.
- Minimum Fee Levels – If you have a minimum fee, make sure it is realistic. Typically, we expect a minimum fee to be around 80% of either your existing annual turnover or projected turnover (for new companies). A quick and easy way of establishing what turnover you have to achieve in order to exceed the minimum fee is to divide the service fee by the minimum fee (whether this is a minimum monthly, quarterly or annual fee). This will enable you to work out if the minimum fee will be a problem or not.
- Disbursements – Again, with the move to greater transparency, this cost element has become a real talking point over the last few years. As a result, many providers now clearly show what, if any, disbursements, they can and will charge as part of the facility. It is therefore important that you review the disbursement list to establish 1) what is relevant and 2) calculate the actual cost this will add to your standard fees. In some instances, an offer that has lower mainstream costs (service and discount fees) can end up being more expensive just because of the disbursement fees.
More Help
Using the services of an industry expert broker the issues regarding offer letters can be navigated easily ensuring that you have the best deal possible. For a free quote search please contact Sean on 03330 113622 or request a callback.
