Why do invoice finance companies usually insist on a minimum monthly Service Fee?
The reason is because invoice finance companies need to get a return on their investment.
Service Fee is related to the level of turnover (including VAT if applicable) which is passed through the facility. In simple terms, the higher the turnover, the lower the percentage level of Service Fee.
To “protect” the finance company from calculating the level of Service Fee from an unrealistically high forecast turnover, minimum fees are set based on the turnover falling short of the forecast level by around 20%.
An example would be – if the forecast turnover is £1m and the Service Fee quoted is 1% (ie £10k per annum Service Fee), minimum fees could be set at £8,000 per annum (or £667 per month). Should turnover fall short to a level of, say £250k, the finance company’s charging basis would be protected because rather than Service Fee being £250k x 1% (ie £2,500 pa), it would actually be based on the minimum calculated fee of £8k per annum.
The difficulty lies with a new business which is unsure of the level of achievable turnover in Year 1. In such circumstances, we would recommend an initial period (say 3 months) with no / low minimum fees and potentially a review of the fees after the first 6 months of operation. Baer in mind, this should be agreed at the outset to avoid expensive Review Fees.
For existing businesses with proven turnover, minimum fees should be less of an issue and should not feature during account operation unless turnover is seasonal. For seasonal businesses we would recommend that minimum fees are set in line with trading cycle expectations (usually either quarterly or even annually).
We would always recommend using a specialist invoice finance broker to give advice – if they have done their job correctly, minimum fees shouldn’t feature.
As always, for advice, please get in touch.
