Glossary of Invoice Finance and other terms.
The Asset Based Finance Association is the Trade Association representing the Factoring, Invoice Discounting and Asset Based Lending industry. Sets and enforces standards within its voluntary membership.
This is the monies owed to you from your customers where you have given credit terms and raised invoices, also known as the sales ledger or debtor ledger.
The agreed percentage that a Factor or Invoice Discounter will advance to you against eligible invoices.
Aged Debtor Ledger Report
A summary report of your debtors (sales ledger) showing all outstanding balances generated from the invoice date.
Approved debt is where your sales invoice has been accepted by the Invoice Finance Company as eligible for funding purposes.
Asset Based Lending (ABL)
The term refers to a finance package secured by a range of business assets. E.g. debtors, stock, machinery or property etc.
Finance against the value of assets such as plant and machinery. Can be in the form of Contract Hire, Contract Purchase and Lease Purchase.
Anything owned by your company that has a monetary value such as Premises, Plant & Machinery, Stock or Debtors (sales ledger) etc.
Assignment of debt
The legal mechanism for transferring the ownership of the rights to the money due from your debtors to the Invoice Finance Company in order to repay the funds they have advanced.
Any other businesses which the shareholder(s)/director(s) own or exert control over.
A regular review of the sales ledger and supporting paperwork undertaken by the Invoice Finance Provider at a clients premises.
Availability (of funds)
This is the amount of cash which is available for you and your business to draw from the Invoice Finance Facility. Usually calculated by multiplying the total eligible invoices by the advance rate, less the amount already drawn plus charges.
Bankers Automated Clearing System. This is an electronic payment system used to transfer funds from one bank account to another. BACS usually takes approximately 3 working days to clear. Although many banks now adopt a ‘Faster Payments Service’ for online payments.
Bad Debt Protection
Also known as Credit Insurance or Credit Protection.
This provides protection against the Insolvency of a debtor. It can also include protection against default for export transactions.
A person, business or other legal entity that obtains funds upon condition of promising to repay the advance at an agreed future time.
A credit facility you agree with your bank allowing you to temporarily spend more than you have in your account to cover short-term financing needs. One of the most popular means of commercial lending in the UK (although not necessarily the most appropriate).
The movement of cash into and out of a business. Measured during a specified period of time in order to give the business management information on which the company’s trading position can be understood.
Clearing House Automated Payment System. An electronic payment system that guarantees same day payment from one bank account to another.
Client Handles Own Collections. A type of Factoring product where the facility is disclosed but the client handles their own credit control.
Also see Borrower
Client Account / Current Account
The account where all movement relating to the finance provided to the Client is recorded.
Where the Factor recovers advances from the invoices assigned.
Expressed as a percentage of the approved Sales Ledger, it is the maximum percentage that a Funder will advance against a particular customer.
See CHOCs but remains fully confidential.
An undisclosed factoring facility where the funder carries out collections as if they were the actual Client. The customers remain unaware of the Factoring Company’s involvement.
Confidential Invoice Discounting
An Invoice Finance Facility where a Lender funds against the sales ledger on a confidential basis but takes no active involvement in collecting the Client’s invoices. The business retains complete responsibility for its credit control and collections.
This is where you both sell to and buy from the same customer. This may result in some form of offset to establish the balance of what is owed and by whom.
A form of Asset Finance, Contract Hire is a fully maintained leasing product. It allows the Company to take control of a vehicle for a fixed period of time without taking ownership of it.
A form of Asset Finance where the Company has the choice of keeping the asset or returning it to the Lender when the agreement ends.
Provides a level of protection against bad debt arising from non-payment of a customers invoice(s) under specific circumstances.
This is the limit applied by the Invoice Finance Company to each customer and therefore the maximum funding that will be given against that customer.
See Bad Debt Protection and Credit Insurance
The payment terms given by you to your customers indicating when payment falls due. (e.g. Payment is to be made within 30-days of the date of the invoice).
See Purchase Ledger
Guarantees given by associated companies in support of the finance provided within a group structure.
A company or individual with whom you have mutually agreed to contract to provide goods or services (at an agreed rate on specified dates, as specified in advance within a Purchase Order).
A charge registered against the assets of the company by any party owed money.
The average number of days taken by your customers (debtors) to pay your invoices.
The percentage value of individual debtors against your overall Sales Ledger value.
Those customers who owe you money against an invoice for goods or services supplied.
The reduction in the value of your outstanding customer invoices by items such as credit notes and customer returns.
Disapproved Debts (Disapprovals)
Debts which the Invoice Finance Company will not fund. Typically debts more than 90 days old (aged) or debts disputed by the debtor, linked to associated businesses or contra-trading customers.
Disbursements are ad-hoc, often one-off charges levied for things like CHAPs payments, credit reports and over-payments.
Disclosed Invoice Discounting
An Invoice Finance Facility where a Lender funds against the Sales Ledger on a disclosed basis but takes no active involvement in collecting the Client’s invoices. The Client retains complete responsibility for its credit control and collections.
Notification to Customers that the debt is assigned to an Invoice Finance Provider.
The rate of interest payable on monies borrowed in the same way as interest is paid on an overdraft facility.
A scheme where the Government provides a guarantee to the Lender for a % of the amount loaned. Designed to encourage more lending to SMEs.
Debts owed by an overseas Customer.
Customer payment terms in excess of 30 days end of month.
The maximum level of funding that can be drawn against your invoices.
Factor (Factoring Company)
A Factor provides funding to the borrower against approved debtor balances and administers the collection of those debts.
A finance facility whereby the Funder advances an agreed % against the company’s debtor book (sales invoices). The lender also provides a full sales ledger management, credit control and collections service
Faster Payments Policy
A banking payment service reducing transfer times between different banks’ customer accounts from three working days using the BACS system, to typically a few hours. Some banks now allow Faster Payments of up to £250,000. Transfer time is not guaranteed nor is it guaranteed that the receiving bank will immediately credit the payee’s account.
Fresh Air Invoicing
When a Client has issued an invoice to a Customer and then drawn monies from the Funder under the Facility prior to the delivery of the goods or services with the knowledge that the Client has not fully completed all or part of its contractual obligations to the Customer. Also see Pre Invoicing.
See Factor or Invoice Discounter
The period of time from the date of invoice that the Funder will advance monies to the Client. Typically between 90 to 120 days from the date of the invoice.
Funds in Use
The balance of the account ie the amount borrowed, including charges, owed to the Funder under the Invoice Finance Agreement.
Where a single customer accounts for a high percentage % of the overall monies advanced by the Lender across all of the Lender’s Clients. The Funder may restrict the level of funding available. Also see Concentration Limit.
Also known as Trade Finance. Funding for the purchase of goods from your overseas supplier including freight and VAT charges.
The value of invoice(s) which are Disapproved Debts (see above) for Funding.
Initial Pre-Payment (IP)
The maximum percentage value of your invoices that will be available for you to draw in advance.
The term applied to a Company which enters into a Company Voluntary Arrangement, a Liquidation (CVL / Creditors Voluntary Liquidation or Compulsory Liquidation) or Administrative Receivership or Administration.
The inability of a company to pay its debts as and when they fall due (Commercial Insolvency Test) or where a company has more liabilities than it has assets (Balance Sheet Test).
See Sales Invoice
A lender who advances monies to a company (the borrower) against that company’s invoices. Unlike a Factor the Invoice Discounter does not collect the debts on the approved invoices of the borrower.
An Invoice Finance Facility where a Lender funds against the Sales Ledger but takes no active involvement in collecting the Client’s invoices. The Client retains complete responsibility for its credit control and collection.
A generic term for finance that is provided where the debtor book is used as Security
Invoice Finance Company (Invoice Finance Provider)
See Factor or Invoice Discounter
A standard form of contract wording used mainly in the construction industry.
A form of Asset Finance with regular monthly payments where the Company will own the asset at the end of the agreement.
Also see Factor, Invoice Discounter, Invoice Finance Company or Invoice Finance Provider
Letter of Credit
A legal document raised by a Bank to provide assurance to a supplier that payment will be made available on presentation of certain documents.
The minimum Service Fee payable to the Funder during the term of the Facility . It may be shown as a monthly, quarterly or an annual figure.
Where the Service Fee is quoted as a percentage % of turnover, should the resulting charge be lower than the minimum fee the balance of the charge will apply.
A finance facility whereby the Funder advances an agreed percentage % against the Client’s Sales Ledger. The Lender also provides a full sales ledger management, credit control and collections service. Should the Customer not pay the invoice, the Invoice Finance Company takes on their debt and you are not required to repay the advance. Effectively a form of credit insurance alongside the funding arrangement.
An additional advance against the invoice value over the pre agreed level of funding.
Secondary security provided by the Directors to repay sums advanced to the Client in the event that the Invoice Finance Company cannot recover its advances from invoices assigned or from the Client itself.
When an invoice is issued prior to goods or services being delivered. Also see Fresh Air Invoicing.
The amount as a percentage that the Funder will advance against outstanding invoices.
An invoice agreed with the Customer to be settled in advance of the goods or services being delivered.
Proof of Delivery (POD)
The evidence that confirms the successful delivery of goods or a service to your Customer.
Outstanding purchase invoices due to creditors. Also called Creditor Ledger.
Confirmation of the goods or services to be supplied between the contracting parties (i.e the Purchaser and Seller), confirming the terms and conditions under which the parties agree to enter and expect to be paid.
Where an invoice previously assigned to an Invoice Finance Company remains unpaid a Funder will reassign that invoice back to the Client. The invoices will have either been Disapproved or Disallowed by the Funder.
Monies owed by Customers on outstanding invoices for good and services provided.
The process whereby the monthly movement of your Sales Ledger is matched to the entries through the Invoice Finance Facility to ensure the Sales Ledger balances agree.
Recourse (Invoice Finance/Factoring)
A finance facility whereby the Funder advances an agreed percentage % against the Client’s Sales Ledger. Should the Customer not pay the invoice the Invoice Finance Company will be able to reclaim their money from the Client. Normally after a period of 90 or 120 days from the date of the invoice. This is usually achieved by taking availability from other invoices under the Facility.
The period of time, usually 90 or 120 days, that the Invoice Finance Company will fund an invoice after which the Client will buy back uncollected invoices. This is usually achieved by taking availability from other invoices.
When an invoice has been outstanding longer than the agreed funding period, the Funder will usually make an additional charge for collection of this. An additional charge levied by the Funder, usually expressed as a percentage of the amount outstanding, when an invoice has been outstanding longer than the agreed funding period.
Where an Invoice Finance Facility is transferred from one Funder to another the new Funder will usually take a ‘reference’ from the outgoing Funder as to how the Client conducted the facility.
A document from your Customer detailing which invoices have been paid or are to be paid on their next payment run.
The invoices raised in respect of goods or services provided.
Sales Ledger (See Aged Debtor Ledger)
A report that shows all the outstanding Sales Invoices that remain unpaid at any point in time.
Also see Cross Guarantees, Debenture, Personal Guarantee
Service Fee (Service Charge)
The charge levied by an Invoice Finance Company for the service provided, availability of finance and the administration of your account. Typically expressed as a percentage of the clients turnover or on a fixed fee basis.
Small and medium sized enterprise (SME) is usually defined as any business with fewer than 250 employees.
Spot Factoring/Selective Factoring/Single Invoice Factoring
The provision of finance against a single or small selection of Customers or Invoices.
Invoices raised for work completed as part of an overall project or order where the remainder of the contract or order is yet to be fulfilled.
This is a type of audit undertaken by the Invoice Finance Provider at a Clients premises prior to a Facility being offered.
The value of the Sales Ledger at the point when the Facility commences. An Invoice Finance Company will “take on” these debts when the Facility starts and use them to form the basis of the initial advance.
See Import Finance.
This is the bank account set up for an Invoice Discounting Client for Debtor monies to be paid into.
A warranty defines the proper performance expected by one party to the agreement and their intention to be bound by it. Not to be confused with a Guarantee.
The amount of capital required to finance stock, debtors, and work in progress in order to meet day to day business expenses. Shown on the Balance sheet as Current Assets less Current Liabilities.