Invoice Finance Glossary

Invoice finance agreements use a vocabulary of their own, and several terms mean something different from their everyday sense: a "debtor" is your customer, a "prepayment" is money paid to you, and "availability" can be zero even when the ledger is full. The definitions below follow the usage of UK providers and the UK Finance Standards Framework.

A

Advance rate

The percentage of an approved invoice's value that the provider pays up front, commonly 70% to 90% and sometimes up to 95%. Also called the prepayment percentage. The rest is held as a retention until the customer pays.

Aged debtor report

A list of unpaid invoices grouped by how long they have been outstanding, typically in 30-day bands. Providers use it at survey and in monthly reconciliations to spot overdue and disputed items.

Approved debtor

A customer the provider has credit-checked and agreed to fund invoices against, usually up to a credit limit. Invoices to unapproved customers may still be assigned but attract no advance.

Arrangement fee

A one-off set-up charge, often 0.5% to 1% of the facility limit, payable when the facility starts. See invoice factoring costs.

Asset based lending (ABL)

A facility that lends against several asset classes together, typically receivables, stock, plant and property, usually built around an invoice discounting line. Used by larger businesses and in acquisitions.

Assignment

The legal transfer of a debt from your business to the provider. Under factoring and discounting, invoices are assigned so the provider owns the right to be paid.

Availability

The amount you can draw right now: the approved ledger multiplied by the advance rate, less funds already advanced, reserves and any limits. It changes daily as invoices are added and payments arrive.

B

Bad debt protection

Optional cover under which the provider absorbs the loss if an approved customer becomes insolvent, subject to credit limits and terms. Priced as a premium, often 0.5% to 1% of insured turnover. See bad debt protection.

Base rate

The Bank of England's official interest rate. Many discount charges are quoted as a margin above it, so the cost of funds moves when the base rate changes.

Book debts

The legal term for the amounts owed to a business by its customers, as recorded in its books. A provider takes a fixed charge over book debts as security.

C

CHOCS (Client Handles Own Collections)

A form of disclosed factoring where customers are told of the assignment but the client, not the provider, chases and collects payment. It sits between full factoring and invoice discounting.

Concentration limit

The maximum share of the funded ledger that one customer may represent, commonly 25% to 30%. Invoices above the limit are not advanced against, which affects businesses with one dominant customer.

Confidential invoice discounting (CID)

Invoice discounting where customers are not told that a provider is involved. Customers pay a trust account in the client's name and the client runs its own credit control. See confidential invoice discounting.

Contra

A situation where you both sell to and buy from the same company, so it can set what you owe it against what it owes you. Providers reduce funding on contra accounts because the net collectable debt is smaller than the invoice.

Credit control

The process of issuing statements, chasing payment and resolving queries so invoices are paid on time. Under factoring the provider does it; under discounting you keep it.

Credit limit

The maximum exposure the provider will accept on a single customer, set after credit checks. Invoices beyond the limit are disapproved for funding until payments bring the balance down.

Credit note

A document reducing or cancelling an invoice. Frequent credit notes signal disputes or pre-invoicing and are examined closely at survey.

D

Debenture

A security document giving the provider fixed and floating charges over the company's assets, registered at Companies House. Most whole-ledger facilities require one.

Debtor

In invoice finance, your customer: the business that owes money on an invoice. Not to be confused with your own borrowing.

Debtor days

The average number of days customers take to pay, calculated as trade debtors divided by annual credit sales, multiplied by 365. See how to calculate working capital.

Disapproved debt

An invoice the provider will not fund, for example because it is overdue beyond the recourse period, disputed, over a credit or concentration limit, or to an unapproved debtor. It still forms part of the ledger but adds nothing to availability.

Disclosed

A facility where customers are told that invoices have been assigned and are asked to pay the provider. Factoring is normally disclosed; invoice discounting is normally confidential.

Discount charge

The interest-like cost of funds advanced, quoted as a margin over base rate or SONIA, with published ranges roughly 1.5% to 5% a year, and charged only for the days funds are outstanding. Distinct from the service fee.

F

Facility limit

The maximum total amount the provider will have advanced at any one time, regardless of the size of the ledger. Growing businesses often need it reviewed.

Factoring

Invoice finance in which the provider advances against invoices and also runs credit control and collections, usually on a disclosed basis. Known as debt factoring in accountancy. See invoice factoring.

Funding limit

Often used interchangeably with facility limit; some agreements use it for the limit applied to a particular debtor or category instead. Check which meaning your agreement uses.

I

Invoice discounting

Invoice finance in which the provider advances against the sales ledger but the client keeps credit control, usually confidentially. See invoice discounting.

Invoice finance

The umbrella term for funding secured on or purchased from unpaid invoices, covering factoring, invoice discounting, selective and spot products. See invoice finance.

M

Minimum fee

The lowest amount of service fee the provider will charge in a month or year, whatever your actual turnover. If fees fall short, the difference is invoiced, including at termination.

N

Non-recourse

A facility in which the provider bears the loss if an approved customer fails to pay because of insolvency, within agreed limits. The opposite of recourse. See non-recourse factoring.

Notice of assignment

The wording printed on invoices, or sent by letter, telling the customer that the debt has been assigned to the provider and must be paid to it. Required for disclosed facilities.

P

Pay-less notice

In construction, a formal notice under the Construction Act by which a paying party states it intends to pay less than the sum applied for. Its existence is one reason construction invoices are hard to fund. See construction factoring.

Personal guarantee

A director's personal promise to meet the company's obligations to the provider if the company does not. Common, sometimes capped, and always worth taking advice on.

Prepayment

The provider's term for the initial advance paid against an invoice. The prepayment percentage is the advance rate.

R

Recourse

A facility in which unpaid invoices are returned to the client after an agreed period, and the advance must be repaid or replaced. Most UK factoring is recourse unless bad debt protection is added. See recourse factoring.

Recourse period

The number of days after the invoice date, or after its due date, at which an unpaid invoice is disapproved and recourse applies, commonly 90 to 120 days.

Refactoring fee

An additional charge applied to invoices that remain unpaid beyond the recourse period on a recourse facility, often a percentage of the invoice value.

Reserve / retention

The portion of invoice value not advanced, typically 10% to 30%, held by the provider until the customer pays and then released less charges. Providers may also hold additional reserves against disputes, contras or credit notes.

Retention (construction)

In construction contracts, a percentage of each payment, often 3% to 5%, withheld by the employer until completion and the end of the defects period. Retentions are rarely fundable.

S

Sales ledger

The record of all invoices issued to customers and the payments received against them. Under invoice finance, the ledger is the asset being funded and must be kept accurate.

Selective invoice finance

An ongoing facility in which the client chooses which invoices or customers to fund, rather than assigning the whole ledger. See selective invoice finance.

Service fee

The provider's main charge for running the facility, a percentage of invoice value or turnover, with published ranges roughly 0.75% to 3% for factoring and 0.2% to 1% for discounting. Also called the administration or management fee.

SONIA

The Sterling Overnight Index Average, a reference interest rate published by the Bank of England. Some providers quote the discount charge as a margin over SONIA rather than base rate.

Spot factoring

A one-off transaction funding a single invoice with no ongoing commitment. See spot factoring.

Survey / audit

The provider's review of your ledger, invoices, contracts and accounts before the facility starts, and periodically afterwards. See what providers check at survey.

T

Termination fee

A charge for ending the facility, particularly before the minimum term expires. Often based on the remaining minimum fees or a percentage of the facility limit. See switching provider.

Trust account

A bank account in the client's name but controlled by the provider, into which customers pay under a confidential facility. Receipts are held on trust for the provider.

U

UK Finance

The trade association for most UK invoice finance and asset based lending providers. Its Standards Framework sets a Code, an independent complaints process adjudicated by CEDR and a Professional Standards Council. See is invoice finance regulated?

V

Verification

The provider's check, before advancing, that an invoice is genuine: for example by matching it to a purchase order and proof of delivery, or by contacting the customer.

W

Whole-ledger

A facility in which every invoice to every eligible customer is assigned, as opposed to selective or spot arrangements. Usual for full factoring and invoice discounting.

Work in progress (WIP)

Work that has been started but not yet invoiced. It is not a debt and cannot be funded under invoice finance, which is why stage-billed projects are harder to finance.

Working capital

Current assets less current liabilities: the money available to run the business day to day. Invoice finance converts trade debtors, usually the largest current asset, into cash sooner. See how to calculate working capital.