How do minimum service fees affect you?

Most invoice finance contracts include a minimum service fee, charged either monthly, quarterly, or yearly, calculated by the lender based on your total annual turnover. The challenge with this structure is that if your business experiences months where income falls short of expectations, or if there is a slowdown, you still pay the same minimum service fee, which does not adjust throughout the year.

This scenario can affect any business but is particularly problematic for companies with seasonal products or services. For instance, if the majority of your income is generated in 3 or 4 months of the year, you may face very low revenue in the remaining months but still be required to pay high monthly minimums.

Consider the numbers:

• Service fees are typically charged as a percentage of your total income on a monthly basis and are calculated from your predicted turnover.
• Suppose your expected annual turnover is £500k, with a service fee of 1%. Your contract's monthly minimums might be around £400.
• If your turnover is only £300k, your 1% service fee should be £250 per month, but due to the minimums, you will still be charged £400.

For seasonal businesses, the impact is more pronounced:

• You might generate £80k for four months of the year and £20k for the other eight months.
• During the busy months, your 1% service fee will be £800 per month, well over the minimum, making no difference. However, for the remaining months, the 1% service fee would be £200 per month, but the minimum fee of £400 would still apply.

Few lenders offer facilities without monthly minimums, as these minimums ensure they receive a certain amount regardless of income fluctuations. Additionally, many brokers may not inform you about lenders who offer no monthly minimums because brokers earn a percentage of the service fee from the lender, benefiting more from higher minimums.