Businesses are locked into long contracts that they don’t understand with hidden fees that they’re not expecting. This needs to change.
Last week, we came across a business that wants to terminate its contract with a factoring company. The contract has 8 months to run. Termination fees were unclear. On enquiry, they were told that it would cost them over 10 times their usual monthly finance cost to terminate!
The smallprint also said that if the business did not give termination notice 3 months before the 12 month anniversary of the contract, it would automatically renew for another 12 months. This is not unusual.
We think that there are a number of basic requirements for invoice finance contracts which could easily be put in place to protect business owners:
1. All fees should be clearly listed upfront or at least in one easily found place/schedule in any contract. Every item that you can be charged for and the fee or charge needs to be made crystal clear.
2. No contract should be more than 12 months in length.
3. All contracts should include clear termination provisions in one easily located place. The notice period and termination fee should be clearly listed in the contract.
4. All contracts should have a maximum termination notice period of two months, ideally one month.
5. No termination fee should exceed two months’ minimum service fees, ideally one month.
These are not difficult conditions to apply. They would ensure businesses were not locked in to finance contracts that hold them back, and make sure they have better information on the cost of finance before making decisions.
Invoice finance is a great way to help businesses grow. It needs reform. It needs to be open, transparent and fair.