A revolution in invoice financing?

Invoice financing as alternative funding 

Invoice financing is a popular form of funding amongst SMEs designed at overcoming cash flow difficulties and ultimately improving business profitability. It is often seen as an attractive alternative to bank overdrafts or loans which can be regarded as unduly restrictive and onerous. 

Whilst invoice financing provides a flexible alternative to traditional funding, it does not come without its own difficulties and the lesser understood nature of invoice financing contracts means customers are sometimes confused by unclear charges. 

Fees and charges

Generally, a customer will expect to pay an arrangement fee to cover the cost of set up, a service charge based upon the annual turnover of the business and a discount charge reflecting the advanced sums. However, contracts may also include less obvious charges such as minimum monthly fees, audit or survey fees, termination fees, drawdown fees and collect out fees. The focus on the headline fees means that all the fees that come with the facility are not always readily identified by customers at the outset and may result in the customer paying more than they originally expected.

In order to tackle this issue, some financiers have been taking steps aimed at making invoice financing more transparent. 

Market movers

In response to criticisms levied at invoice financing generally, Metro Bank SME recently announced that it would abolish value dating charges and termination fees in a move to give customers "immediate and significant savings" with the intention of 'revolutionising' invoice financing fees. Metro is set to abolish 'value days' for new and existing customers, reduce the 'collect-out' fee and introduce a new termination charge-free contract in a move hoped to make "a substantial and long term commitment to the market".

This is not the first time financiers have sought to gain a competitive advantage by cutting fees.  Last November, for example, Nucleus Commercial Finance developed an Invoice Finance Cost Calculator and promoted a fixed fee funding model to offer transparency in the market. 

A better deal for SMEs?

It is hoped that moves by invoice financiers such as Metro and Nucleus will help drive the push for standardisation across invoice financing contracts thereby creating a better deal for SMEs. 

As of yet, the rush towards the 'revolution' in invoice financing does not appear to have happened but as the popularity of alternative financing solutions continues to grow, and finance providers compete for business, more simple or clearer contracts may well be just one of the ways financiers seek to distinguish themselves.

For more information please contact Charles Maunder, Head of the Banking, Restructuring & Insolvency team, on charles.maunder@michelmores.com or +44 (0)20 7659 7680