Why your facility renewal date matters more than you think

Ask most directors of a UK SME when their invoice finance facility renews and you will get one of two answers. Either a vague "some time in the autumn" or a confident date that turns out to be three weeks wrong. Almost no one tracks it in the diary the way they would track a key contract renewal.

That gap, between when renewal actually happens and when the business notices, is exactly where lenders make their margin. The renewal moment is the single biggest pricing lever you have all year. Most businesses give it away.

What actually happens at renewal

Invoice finance facilities are typically agreed for twelve months at a time. As the renewal date approaches, the lender produces a renewal proposal. In the majority of cases, that proposal contains one of three outcomes.

• Rates held flat, terms unchanged. Common if you are a model client and the lender is worried you might leave.
• Rates nudged up by 0.1% to 0.3%, presented as a "small inflation adjustment". This is the most common outcome by a wide margin.
• Rates held flat but covenants tightened, advance rate reduced, or concentration limits sharpened. Effectively a price rise dressed up as a risk adjustment.

Do nothing, sign the renewal, and the facility rolls forward. The lender's account managers are explicitly measured on the percentage of clients who renew without going to market. Inertia is their best friend.

The economics of doing nothing

Across a typical four-year facility holding period, the cumulative effect of small annual increases is significant. A facility that started at a 0.85% service fee and Bank base plus 2.75% in year one can quite easily reach 1.40% and Bank base plus 3.50% by year four. On a £4m turnover business drawing an average of £500k, that is roughly £25,000 of extra cost per year by year four. Across the holding period, well over £50,000 of avoidable cost.

Lenders do not advertise the fact, but renewal is the only moment in the year when the price of your facility is fully negotiable. The rest of the year, you are a captive customer.

What re-broking actually does

Whole-of-market broking at renewal forces price discovery. Instead of looking at one lender's proposal in isolation, you see what three or four direct competitors would charge for the same business today. In a soft market, that usually surfaces a meaningfully cheaper option. In a hard market, it gives you concrete leverage to push your incumbent down.

The savings can be meaningful. Re-broking at renewal commonly recovers in the region of 0.2% to 0.6% on the service fee and a similar margin on the discount fee versus an incumbent's first renewal proposal. On a £3m facility that can be in the region of £15,000 to £22,000 a year.

A worked example

Take a wholesale distributor turning over £4m a year, four years into the same invoice discounting facility. Current terms are a 1.35% service fee and Bank base plus 3.40%, on an average drawn balance of £600k. Total annual facility cost is roughly £74,000.

Renewal proposal arrives sixty days before the date, with a "modest inflation adjustment" to 1.45% service fee and Bank base plus 3.55%. New annual cost would be approximately £79,500, an extra £5,500 a year baked in.

Re-broked across six whole-of-market lenders, the best comparable quote comes back at 0.95% service fee and Bank base plus 2.85% from a Tier 1 specialist. New annual cost roughly £56,000. The incumbent matches at 1.05% service fee and Bank base plus 2.95% to retain the business, landing at c. £61,000. Either way, the saving versus the original "do nothing" renewal proposal is between £18,000 and £24,000 a year.

The ninety-day rule

The practical move is simple. Put your renewal date in the diary now, with a reminder set ninety days before. Use those ninety days to gather the data a broker will need: a twelve-month aged debtor report, your last two management accounts, a current facility summary and a list of your top ten debtors. None of that takes long.

Then go to market. The presence of credible alternative quotes is what creates the price tension. Even if you end up staying with your incumbent, the cost of running the process is dwarfed by the saving it almost always unlocks.

What to ask your incumbent

Before signing any renewal proposal, three questions tend to surface the real flexibility.

1. What is your best price if I commit to a three-year facility rather than annual rollover?
2. Where is the advance rate today versus where it was at inception, and why?
3. What would your pricing be if I went to market and came back with a like-for-like quote 0.3% cheaper?

That last question is the one that does most of the work. Lenders price differently when they think you are about to walk.

Make the diary entry

The single most lucrative finance habit a UK SME director can adopt is putting their facility renewal date in the diary with a ninety-day warning. Everything else flows from that one entry. Without it, renewal happens to you. With it, you happen to renewal.