- 24 Jan
Invoice Discounting Minimum Monthly Fees Charges Compared
I was asked to clarify if minimum annual fees are still charged monthly, and how many providers offer a flat fee structure (as opposed to charging a percentage of turnover). The answer is that most providers have moved away from quoting a minimum annual fee, towards quoting minimum monthly fees. The effect is the same, but I guess the number presented to a prospective client seems much smaller i.e. one month's minimum instead of a years.
Regarding flat fee structures, approximately 20% of providers offer that kind of arrangement, whereby the client pays a set monthly fee, instead of a percentage of turnover, although these flat or fixed fees can sometimes be charged at a premium to the normal method of pricing.
This prompted me to look at some of the minimums we have been quoted recently in respect of an confidential invoice discounting client.
Minimum Monthly Fees
It is common practice for invoice discounting companies to include a minimum monthly fee in their offer, although some will offer without quoting minimums. The purpose of this practice it to ensure that the client reaches at least a fair proportion of the turnover that they say they are projecting. The reason for this is that the fees for invoice discounting are often quoted as a percentage of the turnover that goes through the facility (the value of the invoices discounted).
The Reason For Minimum Fees
So if you discounted say £10,000 of invoicing, with an administration charge (often wrongly referred to to as service charge - which is the correct term for factoring facilities) of say 0.6%, you would pay £60 in administration fee (plus a discount charge which doesn't normally affect the minimums). This might be typical of an average quote for a business projected a turnover of around the £1m pa mark. So over the year the discounter might expect to charge £6,000 of administration charges. However, if that business falls way below the projected turnover the income to the discounter would be far lower, and hence a smaller deal might attract a higher admin fee percentage. This is the purpose of the minimum, to ensure that the volumes discounted fall somewhere near the volume on which the discounter based their costing.
Comparing Minimums Between Discounters
When we sourced quotes for an invoice discounting client recently, we were able to compare the discounters approaches to setting their minimum charges.
The results were quite interesting - and demonstrate that you need to compare approaches and choose wisely, to avoid high charges.
Minimums That Exceed Projections
A small number of discounters actually quoted a minimum monthly fee that would EXCEED the fee expected to be earned (administration fee percentage x projected annual turnover).
This means that if the client achieved their projected annual turnover, they would still be subjected to monthly minimum charges. The range of these minimums was between 105% and 111% of the projected administration charge. Prospects need to be very careful when comparing quotes to ensure that a minimum is not going to bite, increasing an artificially low service charge percentage to a higher figure. So often we see clients that only compare the headline service charge percentage between quotes.
The Amount Of The Minimum Charge
On average the minimum was set at 86% of the fee expected, according to the client's projections. Removing the small number where the minimum exceeded the projected fee, the average was reduced to 80% of the projection. This means that the client would have to exceed 80% of their projected monthly turnover, every month, in order to avoid incurring a minimum charge.
The range of the minimums quoted (excluding those that exceeded the projection) was between 60% and 94% of the projected charge. So there are large differences between providers that could make a big difference to what you are charged. For example, the difference between the top and bottom of the range of minimums was 34%. So looking at an worked example, for a business turning over say £1m pa:
- The projected monthly turnover would be £83,333.33 each month.
- A minimum set at 60% would bite if turnover was below £50,000 each month.
- A minimum set at 94% would bite if monthly turnover fell below £78,333.33.
That is a huge difference of over £28K per month of tolerance in the level of monthly turnover required to avoid incurring minimum fees.
Seasonality & Low Turnover Months
It should also be considered that you might have the odd month when turnover falls short of your projections, so ensuring that you have the greatest tolerance possible in any minimums is likely to be shrewd practice.
Similarly, if you are a seasonal business, you may find that your turnover peaks and troughs throughout the year. Once again, the greatest flexibility in any minimums could be very helpful, as could restructuring the minimums to account for seasonality throughout the year.
- 18 May
Summary Of Our Invoice Finance Pricing Research
This post pulls together all our research, and information, regarding invoice finance pricing and prices.Our free receivables financing guide describes both how the products work, and also how the pricing is structured. It also sets out minimum costs for full turnover products, which start from c. £3,000 + VAT per annum - selective products (typically costing c. 2% per month) can have a much...
- 03 Apr
The Cheapest Invoice Finance Company
If you are looking for the cheapest invoice finance company, you may be surprised to know that there is no single company that answers this description.The cost of an invoice finance facility depends upon a number of factors, and the cheapest provider for any particular circumstances varies according to those circumstances.We have undertaken extensive research into the pricing of invoice finance...
- 29 Mar
Is Invoice Finance Expensive?
Is invoice finance expensive?The answer to the question is that it doesn’t have to be. However, if you choose the wrong provider, you could end up paying more than you need to.Our research has shown that overall pricing for, as an example, a factoring facility can vary by 165% from the cheapest quote to the most expensive. We also saw an 86% differential between the top and bottom of the...
- 18 Mar
Service Charge 67% Of Overall Recourse Factoring Fees
After recently reviewing the result of our confidential invoice discounting (CID) pricing research, I looked back at our recourse factoring pricing study, which completed about a year previously.The results were similar in that they showed a wide range of pricing differentials between the top and bottom ends of the market, in fact the range was a staggering 165% between the cheapest and most...
- 14 Mar
Why You Should Not Just Compare Invoice Discounting Pricing Percentages
So often we speak to customers that are comparing various offers for invoice discounting, and their key measure for comparison is the headline administration (often wrongly referred to as service charge) charge percentage.With an offer for invoice finance, you normally are quoted a service fee (or administration fee for invoice discounting), a discount charge (similar to interest) and then there...
- 02 Feb
41% Cost Saving On Invoice Finance
You may be forgiven for thinking that any existing users of invoice finance will have moved providers, and will be benefiting from the lowest prices that are on the market, but that is clearly not the case. This was highlighted in the case of a prospect that we assisted over the last few weeks.They spoke to us regarding an existing invoice financing facility, that was being provided by a bank...
- 29 Jan
Service Charge & Discount Charge Differences Between Invoice Discounting Companies
I recently reported the 86% differential between the cheapest and most expensive quotes that we received for a particular client situation. This difference was based on a comparison of the anticipated charges that might be levied by different invoice discounting companies.I thought it might be interesting to look in a bit more depth at the components of those costings, and how they vary between...
- 23 Jan
41% Cost Saving On Recourse Factoring
One of the things that we pride ourselves on is keeping up to date with pricing around the factoring market, so that we can find the best rates for our clients.In a recent example we were able to find a c. 41% projected cost saving for a prospect, on the fees that they were already paying - this equates to a substantial annual cost saving for the company.This particular example involved a company...