Glossary of terms for Invoice Finance

The invoice finance and small business finance industry is awash with jargon and terms that many outside of the industry don’t quite follow.

If you are unsure about any of the terms that appear on the Factoring Finance web site or when discussing terms with invoice finance providers, the following ‘glossary of invoice / finance terms’ section should help:

Advance rate
This is the agreed percentage of eligible debts which will be made available for you to draw down from your invoice finance facility.

Aged Debtors Report
This is a summary report of all outstanding balances for each of your debtors over a specific period. This report is generated from the invoice date.

Approved Debt
Approved debt is one which has been accepted by the invoice finance company as being eligible for prepayment or advance.

An asset is anything owned by your company that has a monetary value. For invoice finance, this is in respect of your debtors. Another frequently used term for debtors is your Sales Ledger or Accounts Receivable Ledger.

Assignment of Debt
Assignment of Debt related to the legal mechanism by which an invoice finance firm obtains the right to collect cash directly from your debtors to repay amounts that they have advanced to you.

Availability (of Funds)
The amount of cash which is available for you to draw each day should you so require. This is usually calculated by multiplying the total eligible invoices by the advance rate, minus the amount already drawn, plus charges up to that point. The invoice finance provider’s software which you log into will have such figures readily to hand, so you don’t need to worry about making the calculations yourself.

A BACS is a method of electronic payment and the initials stand for ‘Bankers Automated Clearing System’. Using this, funds may be transferred from the invoice finance providers account to your own bank account via this system. Although many banks now adopt a ‘faster payments’ policy for online payments, BACS typically take 3 working days to clear.

CHAPS is another form of payment for same day transactions. It stands for Clearing House Automated Payment System.

Cash Flow
Cash flow is the movement of cash into or out of a business. It is usually measured during a specified, finite period of time in order to give the business, management information on which the companies' value and trading position can be understood. Cash flow is used to then asses how future monies in and monies out will affect the business.

Positive cash flow is simply that the business has sufficient cash to maintain its liabilities as more money is coming in over the period being reviewed, than there is money going out. Negative cash flow means the opposite and there is a shortfall.

Note: cash flow relates to the balance of monies in/out and does not indicate profit/loss

Confidential Invoice Discounting (CID)
This is an invoice finance facility where funds are advanced as normal to a business by the invoice finance broker (discounter) and in doing so secured against the value of the business sales ledger / debtors, BUT where the funding relationship is confidential and not disclosed to your customers.

Contra-trading is where you might buy from and also sell to the same customer and which may result in some form of offset to establish the balance of what is owed and by whom.

Debtor factoring companies normally find contra trading an issue as they rely upon the debts being collectable as security (being assigned) for the funding that they provide.  Where a client is also purchasing from their debtors there can be outstanding debts that the customer may offset against the payments that they are prepared to make in respect of the client's sales invoices. Although not impossible to obtain, factoring where contra trading is involved is seldom used owing to its complexity and security difficulties.

Credit Insurance
Credit Insurance is more commonly referred to as Bad Debt Insurance or Bad Debt Protection.  It provides a level of bad debt protection against non payment by your customers under certain specific circumstances. Bad Debt Policies can be purchased on a "stand alone" basis but there are also integrated as part of a "non recourse" invoice factoring facility.

Credit Limit
Whilst most companies have an idea of what credit limit they will extend to their customers, in invoice financing terms, ‘credit limit’ is in respect of what the invoice finance funder deems to be an acceptable/prudent level of credit.

The invoice finance company in assessing these limits will take into account, factors such as your customer’s credit history the limit given will reflect the level at which they are prepared to advance money.

Current Assets
Current Assets include things like cash, debtors, stock and anything that you would expect to convert into cash within twelve months of your balance sheet date.

Debtor Concentration
This term is used in evaluating an ongoing invoice finance facility or as part of the initial application and it relates to how your customers are distributed across your debtor book in terms of value (and therefore risk).

If for example you had 1 customer your debtor concentration obviously 100% which poses a higher risk to a lender. If you have 10 customers of equal value then the Debtor Concentration would be 10% and so on in this fashion.

Debtor Concentration is important in the risk assessment and depending on its composition, has varying effects on fees.

The meaning of this term is in respect of anything that can reduce (i.e. dilute) the value of your outstanding customer invoices which you have already raised and are wanting an advance against. It covers things like credit notes and customer returns.

If in the course of your normal business you end up refunding back monies due to customer return, this will obviously impact on the level of advance an invoice finance provider will be willing to put in place.

Disapproved Debts (Disapprovals)
Disapprovals are debts which a factoring or invoice discounter will not provide funding against. Reasons vary but the typical ones are if the debt is more than 90 days old (aged), or if the debts are disputed by the debtor, or those debts which are known to be bad or irrecoverable (e.g. the customer in liquidation).

Invoice factors charge two normal fees, an agreed fee usually of a small percentage of  the invoice value, and an interest fee (at a pre set interest rate) on the monies draw down (i.e. advanced) to the borrower. Disbursements are ad-hoc, one-off and usually very small charges typically levied for things like postage, stationery and call charges etc to do with exceptional or extraordinary activities involved in serving an invoice finance facility.

Fixed Assets
Assets held for use by the business rather than for sale or conversion into cash, e.g. fixtures and fittings, equipment, buildings.

Full Service Factoring
A method of providing accelerated cash flow to a business using the sales ledger (receivables) as security to borrow money and where the lender also provides a full sales ledger management, credit control and collections service.

Facility Limit
The maximum balance to which the current account can be drawn at any given time. This limit is often flexible by negotiation with the invoice finance company.

The value of debts which are disapproved (see above).

IP / Initial Pre-Payment
The maximum percentage value of your invoices that will be available for you to draw in advance.

Non-Recourse Factoring
Non-Recourse Factoring is a factoring facility where, under certain circumstances, the factor provides credit insurance as part of their overall funding package. This provides a level of bad debt protection against non payment by your customers.

The maximum percentage value of your invoices that will be available for you to draw in advance.

A debt previously assigned to an invoice finance company which has been returned to you.

A process of matching the balance of your sales ledger to the balance recorded by the invoice finance company at the same point in time; this is typically undertaken at the end of each month.

Recourse Factoring
Under a standard recourse factoring arrangement, the factor will seek to recover from the client advances made to the client in respect of any debt that is not collected within a given time period (usually 90 days following the month of invoice).

Refactoring Fee
An additional charge made to cover the cost of collecting debts which have aged beyond the agreed credit period; this charge is usually expressed as a percentage of the amount outstanding.

Service Fee
The charge levied by an invoice finance company for the administration of your account. This is typically expressed as a percentage of sales and is likely to be higher for a full factoring service than for invoice discounting in view of the additional workload involved.

Take-On Debts
The value of the ledger at the point when the facility commences. These debts will be "taken on" when the facility starts and will be used to create the initial availability.

Working Capital
Current assets less current liabilities, representing the investment required to finance stock, debtors, and work in progress.

Alternatively, you can use can call/email us directly with your query through the contact us section.

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