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Negotiating the terms of your facility

When speaking to any lender it is important to look beyond the headline rates.

The headline rates for any factoring or invoice discounting facility will include a prepayment percentage, a service fee and also a discounting fee.

It is important to look at each one and see what else can impact on the cash generated and also on the costs of the facility.

Prepayment level and the amount of cash actually generated

The prepayment level is the amount that the factoring or invoice discounting lender will provide you against each invoice that you notify. For example the initial offer may say an ‘85% prepayment’ or ‘up to 90% prepayment’. Until you have a formal credit backed offer these initial offers can be misleading and always treat offers with ‘up to…’ before the percentage with caution.

There are also other things to look out for that can dramatically impact on the actual prepayment level received.

Concentration limits dictate how much debt you can have outstanding to any one customer. Some lenders may impose a 20% concentration limit. This means that they will not finance any one customer that accounts for more than 20% of your sales ledger. If you have a lot of small customers this may not be an issue. However, if you have one large customer that accounts for half your turnover this could cause serious issues.

The limits provided on each debtor can also impact on the amount of cash you generate. If for example you have a customer who on average owes you 50,000 euros but the lender will only provide a limit of 20,000 euros for that particular customer then the prepayment level almost becomes irrelevant.

In a similar way the over facility limit can impact on the cash generated. If the lender imposes an over limit of 100,000 euros but your debtor book is at 200,000 euros the prepayment level is not a major issue.

How much will it really cost?

Beyond the headline rates of the service fee and the discounting fee it is important to look out for and understand the impact of other charges. These can include:

  • Arrangement fees – a fee for setting up the facility
  • Audit fees – fees for auditing your business. More relevant for invoice discounting clients but it is important to check both the cost and the frequency.
  • CHAPS fees – the fee the lender charges you for making same day transfers when you need to access cash quickly.
  • Minimum fee – this is the minimum service fee a lender will charge over a year. It can be imposed monthly, quarterly or annually and it kicks in if your turnover does not reach the anticipated levels.
  • Re-factoring fees – this is the fee a lender will charge you when they pass the debt back to you after a certain period of time called the recourse period.

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