Factoring and invoice discounting contracts are often difficult to understand and not balanced from a customer’s perspective. Proposals from invoice finance providers usually are quite lengthy with a long list of different fees, such as “arrangement fee”, “service fee” or “audit fee”.
For anyone but the experienced adviser, understanding your quote or contract is a challenge and likely to result in unexpected outcomes. There are so many different fees quoted by the traditional invoice finance providers:
- “Arrangement fee”
- “Service fee”
- “Non-recourse fee”
- “Annual review fee”
- “Retrospective fee”
- “Refactoring fee”
- “Extended service fee”
- “Discount charge”
- “Audit fee”
- “Trust account fee”
If you'd like our help understanding a quote, please feel free to contact us and we can send you a comparison against IX very quickly.
Here are some useful explanations behind your factoring quote:
Advance rates, explained
Sometimes invoice finance providers will tell new clients that they can “receive up to 85-90% of their invoice in advance”.
Remember- “up to” 85-90% often translates into a lower advance rate than advertised.
If you’re looking at entering into a facility, you might also receive a “teaser” term sheet from a factoring company. Bear in mind that once the invoice finance provider has all the details it needs about your business, these terms are likely to change.
Here are some common issues with quoted advance rates:
GST: You might be given an advance rate on the net-of-GST amount of your invoice. So if, for example, you sell an invoice worth $100k (including GST) and your advance rate is 50% of the net of GST amount, you end up receiving 50% of $90k, not of the full $100k. That’s only $45k in your account, equivalent of 45% advance rate.
Facility limit, or Prepayment Review Level: If you’re quoted a facility limit of, say, $100k (with an advance rate of 80%), and then want to sell an invoice worth $200k, bear in mind that the maximum you’ll drawdown will be $100k (your limit), giving you a real advance rate of 50%.
Discount fees: we have seen many factoring agreements where the client is charged a discount fee and a “Purchase Cost” on every invoice but not every invoice is eligible for funding!
Concentration limit: Although it’s great news for you if one of your customers starts ordering more from you, that might be a problem for a factoring provider. They may be worried about “concentration risk” if any one customer hits over 10% of your ledger. If this happens, your factoring provider may give you a lower advance rate on that customer’s invoices.
Exclusions: Do you trade overseas? Does your contract imply that your customer can return some of your goods? Can they withhold payment to you for whatever reason? These things might mean you get a lower advance rate, since factoring companies see these as potentially riskier transactions.
Lock-ins: it is rarely clear how much is payable to the factoring company if you want to break the contract.
At IX we never give you a ‘teaser’ rate.
On our website you’ll see what our average advance rate is, not the best case scenario. We also make sure you fully understand our simple fees before you make any commitment to use IX.