Hidden bank fees land UK business with £425m bill

UK banks are charging businesses that need short-term finance £425m a year in "hidden" extra fees, according to research.

Thousands of businesses use "invoice financing" to raise bank loans, allowing them to draw money against sales invoices before they have been paid. But research by MarketInvoice, an online invoice marketplace, has found that some 26,000 UK businesses face up to 35 hidden fees in their invoice finance contracts with banks, on top of interest and service fees.

The extra charges range from fees for handling paperwork to extra costs for making same-day payments.

The research, based on revenues from banks' invoice financing arms, showed high street lenders charge 6.4p on average for every £1 of invoice finance.

About 50,000 businesses borrow £20bn every three months in the UK invoice finance market. It is unregulated - meaning that there is no standard way of presenting prices.

Anil Stocker, chief executive of MarketInvoice, said: "As a result the market is plagued by bad practice."

Louise Beaumont, head of public affairs at GLI Finance, a small business lender, said invoice financing was "legendary for its opaque fee structure".

"Providers of invoice financing advertise the headline cost but not the full cost to the business in question," she said.

The government passed a law at the end of March forcing high street banks to refer failed small and medium business loan applications to alternative lenders.

Ms Beaumont said, as a result, "While high street banks find it difficult to provide financing to small and medium sized companies themselves, they're more open now to using other platforms to originate invoice finance and loans."

In response to the legislation, Royal Bank of Scotland and Santander UK have formed partnerships with peer-to-peer lending and other alternative finance websites, as a route for rejected businesses to apply for loans.

RBS has partnered with Taulia, an alternative finance company.

Peer-to-peer websites can provide businesses seeking loans with more flexible alternatives to high street banks.

They connect sophisticated investors with businesses - investors might buy invoices in exchange for high annual returns, often above 10 per cent, while businesses can use the cash that would otherwise be locked up for 30-120 days while they were awaiting payment.

The British Business Bank, a government-funded lender, said there was £220m of peer-to-peer invoice finance in the year to October 2014, double the amount in 2013.

A study last year by Nick Wilson, a professor at Leeds university, found that the amount lent to UK businesses by suppliers in the form of late payments amounted to £327bn and was one of the biggest sources of credit in the economy.

It also found that delays between the delivery of goods and the receipt of payment between companies was widening, increasing the risk of insolvency.

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