Reading an invoice finance agreement: the terms worth understanding

Invoice finance agreements are not designed to be difficult, but they contain a handful of terms that carry more weight than they appear to. Understanding them before signing is the difference between a facility that fits and one that surprises.

Advance rate

The proportion of an eligible invoice’s value the provider makes available up front. The remainder, less fees, follows when the customer pays. Advance rates vary by provider, sector and the quality of the ledger.

Service fee and discount charge

Facilities commonly involve two kinds of cost: a service fee for operating the facility, often expressed as a percentage of turnover, and a discount charge for the funds actually drawn, usually expressed as a rate above a reference rate. Comparing facilities means looking at both together against the business’s expected usage.

Concentration limits

A cap on how much of the funded ledger can relate to a single customer. If one customer makes up a large share of sales, this limit can materially reduce the funding available, whatever the headline advance rate says.

Recourse and disapproved debts

Under a recourse facility, invoices that remain unpaid beyond an agreed period are typically handed back to the business. Understanding what happens to old or disputed invoices matters, particularly for businesses with slower-paying customers.

Minimum term, minimum fees and notice

Facilities commonly have a minimum period and a minimum annual fee. Notice periods for exit vary. These terms are easy to skip past at the start and hard to change later.

Security and guarantees

Providers commonly take security over the debtor book and may request personal guarantees or other support from directors. The nature and extent of this should be clearly understood before any commitment.

A facility that looks cheapest on the advance rate can be the most expensive once minimum fees and concentration limits are applied to a real ledger.

This is a general description of terms commonly found in invoice finance agreements. Agreements differ, and businesses should take their own professional advice before entering into any facility.