Case Study 12 – Minimum Annual Fee – the small print

The Minimum Annual Fee
We were approached by a company unhappy with the operation of their factoring facility due to the fact that 75% of their business was to one customer (a multinational telecoms giant) and the factoring company would only fund the invoices to a maximum of 50%.

As the company were recruitment contractors needing to pay their contractors at the end of each month it was proving difficult to finance the business with the factoring company being so restrictive.

The factor offered to increase the funding limit to 75% on this particular customer’s invoices in return for a second charge on the directors home.

The company contacted ourselves and we sourced a replacement facility with a factoring company willing to fund this particular debtor up to 80% but the stumbling block proved to be the extortionate fees demanded by the existing factoring company to transfer the facility away.

The existing facility provided for three months notice to be given to expire on the anniversary date of the agreement but as the company missed the deadline by a month they were told that they would have to pay the Minimum Fee for the whole of the second year.

There are setup costs involved in every factoring facility which the factor will amortize in the first year but we cannot think of any valid reason why a Minimum Annual Fee should be necessary in the second and subsequent year except as a lever to keep hold of clients that wish to transfer to other factoring companies and in our opinion this is highly immoral.

As a matter of interest the factoring company that we sourced as a more suitable alternative doesn’t operate in this manner.

What do you think?