Guide to Factoring and Invoice Discounting

Trades and Business
Development
Business Finance Services: A Guide to Factoring
and Invoice Discounting
The overriding concern for a finance company is how "recoverable" the
debts are in the event that the company ceases to trade or becomes
insolvent. In most cases, the production of a formal offer letter comes
following an audit at your premises to perform "due diligence". The
factor/discounter will need to audit how well the business is run, what
systems are in place and verify that the financial statements and
business plan make sense.
Augustus Hall Limited (RC. 912580)
www.augustushall.com

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Business Finance Services: A Guide to Factoring and Invoice
Discounting
Time is not your friend if you have slow cash flow...
A Guide to Factoring and Invoice Discounting
Note - if any of the terms below are new to you, do take advantage of our Glossary of Business
Finance terms in the last page of this write-up.
Introduction
The UK market for factoring and invoice discounting continues to grow year on year.
Unlike overdraft facilities which are pre-agreed and relatively rigid, invoice finance provides
flexibility as sales grow without the need to re-negotiate the entire facility.
Most businesses trading on credit terms can now be supported, whatever they are involved in
providing, the trade debts are on a business to business basis and are "recoverable".
The overriding concern for a finance company is how "recoverable" the debts are in the event that
the company ceases to trade or becomes insolvent.
In most cases, the production of a formal offer letter comes following an audit at your premises to
perform "due diligence". The factor/discounter will need to audit how well the business is run,
what systems are in place and verify that the financial statements and business plan make sense.
The commercial reality today is such that each company will take a differing view of risk and
"recoverability" so that funding trade invoices is more a question of finding the right provider with
the right view of your business.

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If you are not sure that your current debtor book is fundable due to accounts being over 90 days old
then talk to us about our UK debt recovery and international debt collection services. We have the
experience and expertise to turn your debtor book into a funding proposition.

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What is Invoice Discounting?
If your cash flow is slow, do something about it...
What is invoice discounting and how does it work? Invoice Discounting provides a cash flow
solution for business.
How Does Invoice Discounting Work?
The invoice discounting company (discounter or invoice discounter) will buy the trade debts (also
known as accounts receivables, or your sales ledger) of the business at an agreed funding rate.
Discounters typically advance 80% to 85% of the face value of valid invoices, for example...
A company raises new sales invoices of £100,000. Based on the 85% advance it would generate a
cash injection of £85,000. This releases working capital that would otherwise be "locked up" and
provides immediate cash flow enabling you to pay creditors and use that cash for expansion and
growth.
The discounter will then continue to provide you with up to 85% of the value of new sales invoices,
normally within 24 hours of you raising them. The other 15% of the value of your sales invoices is
passed onto you (minus fees) when the customer pays.
There are some circumstances where overpayments can be arranged, however this type of advance
will be determined on the basis of how the facility has been maintained and if a successful and
trustworthy transactional history has been built up.
Once the facility is in place, there is no limit to the amount you can borrow as the level of finance is
directly linked to the level of sales. So as your business grows so does the amount of funding
available to you. This is in sharp contrast to bank overdrafts, which require regular re-negotiation
and arrangement fees.

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What Are The Criteria For Invoice Discounting?
Invoice discounting facilities are normally made available to established businesses with turnovers
in excess of £250,000.00 which have good systems in place to ensure reliable collections from their
customers.
How Does Invoice Discounting Differ From Factoring?
The fundamental difference between invoice discounting and factoring is that you are responsible
for the collection of cash from your debtors. The payments that you receive are paid into a nominee
bank account which is administered by the invoice discounter.
Where a Confidential Invoice Discounting facility (CID) is in place your customers are unaware that
a discounter is funding your business.
For any business the potential for bad debt will always be an issue. If you are concerned about bad
debts, many discounting companies can provide a facility that will include bad debt insurance
protection for additional security.

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What is Factoring?
What is factoring (or invoice factoring) and how does it work? Factoring provides a working capital
solution and operates in much the same way as invoice discounting except this type of funding is a
"disclosed" facility which means that your customers will be fully aware of the factor's existence.
How Does Factoring Work?
Factors typically advance 80% to 85% of the face value of valid invoices, for example...
A company raises new sales invoices of £100,000 which contain an instruction to pay the factor.
Based on the 85% advance the company would receive a cash injection of £85,000. This releases
working capital "locked up" that will improve the cash flow enabling you to pay creditors and use
that cash for expansion and growth.
The factor will send out debtor statements, chasing letters and will also contact debtors by
telephone to ensure prompt payment.
The factor will then continue to provide you with up to 85% of the value of new sales invoices,
normally within 24 hours of you raising them. The other 15% of the value of your sales invoices is
passed (minus fees) onto you when the customer pays.
For any business, the potential for bad debt will always be an issue. If you are concerned about bad
debts, many factoring companies can provide a facility that will include bad debt insurance
protection (commercial-trade-credit-insurance) for additional security.
There are some circumstances where overpayments can be arranged, however this type of advance
will be determined on the basis of how the facility has been maintained and if a successful and
trustworthy transactional history has been built up.

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Once the factoring facility is in place, there is no limit to the amount you can borrow as the level of
finance is directly linked to the level of sales. So as your business grows so does the amount of
funding available to you. This is in sharp contrast to bank overdrafts, which require regular re-
negotiation and arrangement fees.
What are the criteria for factoring?
Factors' requirements vary from company to company. Some will consider start-ups but typically
the company must be operating on a business to business basis and have a turnover of £50,000.00
or higher.
Small Business Factoring
Small business factoring is often the ideal solution for small businesses that don't have a dedicated
credit controller and need access to flexible funding options that go beyond the level of finance that
would be available from a traditional overdraft.
Credit Control/Credit Management firms can introduce you to a factor that specializes in helping
smaller businesses or even start-up businesses. There are no minimum size criteria and annual
services charges can start from as little as £2,000. We can also introduce you to lenders that can
provide you with a loan via the Small Firms Loan Guarantee Scheme.

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Is Factoring Or Invoice Discounting Suitable For My Business?
The most suitable candidates for factoring and invoice discounting are growing businesses because
the level of funding grows proportionately as turnover increases. However, if you are using
traditional loan and overdraft facilities which the bank will not increase, then this type of facility
will provide a solution for cash flow.
Although this is a relatively low cost way of increasing your cash flow it would be wise to examine
the costs of alternative options before entering into an agreement. Also, debt finance providers tend
to prefer firms which receive invoices where it is clear that the goods or services have been
delivered and where few payment disputes or credit notes have occurred.
A potentially costly mistake which some companies make when arranging a factoring service is
picking the first provider they come across. There are so many providers that simply looking on the
internet will probably not get you the best deal.
Online Quotations for Factoring: A Word of Caution
There are many websites that provide online quotations for factoring and invoice discounting
facilities. Although these are a useful way of obtaining quick price comparisons, they should be
treated with care.
Through our experience of working with customers who have initially used these sites they
produce figures which ultimately have no relevance to the final funding proposal or standard of
service because of:
1. Amended quotations - Quotations are produced automatically using formulae that are built into
the website. Providers use a variety of criteria to calculate the initial payment percentage and often
one of the criteria could significantly affect the amount advanced, for example a large number of
credit notes raised.
2. The focus on price - One of the benefits of a site that allows you to compare online quotations is
that you can compare the price charged by different providers. However, there is a drawback with
this approach in that it doesn't focus on the service you will receive or the nuances of how the
provider operates.

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Whilst price comparison is important, in practice there are subtle differences between the way that
different factoring and invoice discounting companies operate and these differences need to be
understood.
Factoring with one provider may suit one business but not another due to the nature of the product
or service provided.

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The Advantages and Disadvantages of Factoring and Invoice Discounting
Advantages of Factoring and Invoice Discounting
Making use of an invoice factoring or discounting service can improve your bottom line and offer
your company a whole range of benefits, such as:
1. Improved cash flow by releasing up to 85% of funds against the value of outstanding invoices
2. It gives you access to an ongoing supply of cash that grows as your sales grow
3. In the case of factoring, you work with a dedicated team of professionals who will prepare and
send out statements, telephone all of your customers, collect payments for you and maintain
professional and detailed accounts of your transactions
4. Management time is freed to drive the business forward as you are no-longer spending time on
unpaid accounts and are no-longer held back by insufficient cash flow
5. By making use of a factoring facility you can benefit from improved profitability as you can pay
suppliers earlier, buy in larger quantities and take advantage of any volume discounts available
6. Knowing exactly when you are going to be paid assists with financial planning
7. You may find that some customers respect factors and pay their debts more promptly
8. It is possible to protect your company from bad debts if you decide to choose non-recourse
factoring
9. You receive cash as soon as orders are invoiced which gives you the option of using it for capital
investment and to fund future orders
10. The facility provides flexibility for the business and access to a range of additional products
such as cash flow loans, trade or transactional finance

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Disadvantages of Factoring and Invoice Discounting
1. The factor will want to set credit limits for customers which may affect the way you trade
2. Exiting the agreement can be difficult
3. Disputed invoices must be dealt with quickly to avoid them being re-coursed
4. In the case of factoring, you are reliant on the factor to collect the debt in a timely and efficient
manner

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Recourse and Non-Recourse Factoring Facilities
When you make use of an invoice factoring company it is very important to be aware of who is
responsible for debts which occur when customers fail to pay.
If you have a recourse factoring facility then the factor will not take the risk of the debt on, they will
just collect the money from you if an invoice goes unpaid.
Recourse Factoring Facilities Explained
This is a lower cost form of factoring because you continue to take the risk of bad debt rather than
the factoring company. This type of factoring is also easier to attain, the invoice factor will tend to
have less stringent rules about your business systems and the payment history of your customers.
Once the invoice is returned to you, you are responsible for collection. If you are unable to do this
then you can contact us and make use of our recourse collection service (see UK commercial debt
recovery and international debt collection).
Non-Recourse Factoring Facilities Explained
With non-recourse factoring the factor assumes responsibility for all bad debts. This means that if a
customer does not pay an invoice, either through insolvency or protracted default, you do not have
to pay back the amount advanced to you by the factor.
The factor legally takes ownership of the debt and as a result this type of facility attracts higher fees
as the factor is increasing their level of risk.
Non-recourse factoring facilities are difficult to obtain if you have weak financial systems or
numerous customers with bad payment histories as strict credit limits will be set for your
customers.
It is important to choose the correct type of factoring for the current state of your business, but
equally important is choosing the right invoice factoring company to deal with. There are some

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factors in the market who offer lower levels of customer service, even if they charge low fees this
lack of service could end up costing you more in the long run.

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Bad Debt / Credit Insurance Protection
Bad debt protection can be provided independently (on a stand-alone basis) or in addition to either
factoring, invoice discounting or export finance.
In some cases funding is linked to credit limits but we can introduce you to providers where that is
not the case.
If you don't want finance or collections support, we can introduce you to a specialist organization
that can provide you with credit insurance against bad debts. Commercial trade credit insurance
can be provided against all of your sales, on a whole turnover basis, or against specific customers. It
can also be provided on a catastrophe basis so that you are only covered against significant losses.
If you would prefer 100% cover we are equally able to assist you. See credit insurance for details.

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Bad Debt Insurance Protection: Commercial Trade Credit Insurance
Credit Management Services
Cash flow is more important than profit and the lack of cash at crucial trading periods is often the
reason businesses fail...
Why Credit Insure?
The extension of trade credit is a requirement of daily business activity and the future cash flow of
any business is often tied up in the biggest current asset - the debtor book or sales ledger.
Commercial trade credit insurance is a credit management service designed to protect not only this
valuable asset but also to protect the company balance sheet and ultimately the net worth of the
business.
In any trading climate, protecting your business from the danger of bad debt or insolvency whether
on a 'Whole Turnover', 'Key Account' or 'Key Contract' basis could make the difference to your
businesses survival.
Trade Credit Insurance
The commercial trade credit insurance market has evolved in recent years and offers an increasing
range of products to cover not only UK Sales but also Export Sales on a 'Single Debtor', 'Selective
Accounts' or Turnover' basis wherever the company trades.
These products can also be used in conjunction with any invoice discounting or factoring facility the
company uses for working capital.
Obtaining a correctly packaged insurance policy requires expertise in the commercial trade credit
insurance market place.

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Export Factoring / Discounting Facilities
Most invoice factoring and discounting companies now offer export factoring and discounting
finance facilities.
The main differences associated with export factoring are:
1. The fees tend to be slightly higher
2. A minimum annual turnover of £100,000 is normally required but this can also include domestic
sales
3. Currency movements can affect profit margins and it is prudent to use currency hedging to
minimize risk
4. Credit insurance protection is often required to reduce the risk of bad debt
5. When shipping goods it is necessary to calculate accurately the number of funding days required
and agree them with the invoice factor or discounter. Typically invoices are funded for a maximum
of between 60 to 90 days, however from the point of dispatch to arrival with your customer may
take 90 days.
The customer then pays 30 days from the date of arrival so actual funding required would be 120
days to avoid re coursed invoices impacting on your availability and cash flow.
If you are importing goods we can also introduce you to trade finance specialists that can provide
trade finance facilities that will assist you with documentation (for example letters of credit and
bills of exchange) in addition to finance for your imports.
Single Debtor Factoring, Single Invoice Factoring & Transactional Finance
Businesses can sometimes require finance from a factoring company against a single customer
(single debtor or prime debtor). This may be due to a prime debtor concentration of trade into a
single customer, or seasonal trading peaks, or you may just want finance against one customer for a
specific project without giving the factor your whole sales ledger.
We are able to introduce you to companies that can provide finance against single debtors (prime
debtors) or even single invoices to improve your cash flow.

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Trade Finance
We can help you raise finance in respect of goods that you are importing from suppliers abroad or,
in respect of export sales, to customers that are based abroad (Export Finance). We can even help
with cross-border transactions where the goods move from one foreign territory to another.
This type of facility enables you to pay your suppliers on time whilst receiving extended credit
terms.
We at Augustus Hall Limited (RC. 912580) have access to specialist trade financing companies that
are experienced in all aspects of international trade such as letters of credit, bills of exchange and
import documentation.
We can introduce you to a trade finance provider that is suitable for your business. The cost of
trade finance facilities depends very much upon your requirements and circumstances.

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Invoice Factoring / Discounting Funding Terms: What Does It Cost?
Understanding the Charging Structure
It is wrong to assume that this invoice factoring or discounting finance is expensive as the product
is priced according to risk specific to your business and charges will vary from business to business.
There are three principal charges to be aware of:
1. The Service Charge & Minimum Annual Service Charge
The service charge, administration charge or credit management fee as it sometimes called will
usually be a percentage of the value of the invoices that are funded. This is an ongoing fee and in the
case o factoring provides you with the facility and a credit management service. In the case of
invoice discounting this provides the finance facility and the cost of the monitoring/auditing.
There is normally a minimum service charge quoted which is either charged monthly, quarterly or
annually and is calculated on turnover. This provides the factor with the minimum income they
expect from the facility and serves to protect them in the event that their client's turnover falls
short of the expected financial projections.
Typical factoring fees range from 0.75% to 2.5% of total turnover whereas invoice discounting fees
range from 0.2% to 0.5% of turnover which are significantly less but remember only finance is
being provided.
2. The Interest or Discount Charge
The interest or discount charge works in a similar way to an interest calculation and is based on the
funds in use. This charge is calculated at an agreed margin and typically ranges between 1.5% and
3% over bank base rate.

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3. Other Charges
There may be other charges which may or may not be explicitly stated within the quotation - it is
prudent to question the factor about these. These charges could include:
a. A re-factoring charge (an additional charge on debts reaching a certain age)
b. Charges in respect of electronic transfers or returned (bounced) cheques
c. "Trust Account" charges applied to the transactional activity of your invoice finance account
d. Small additional charges for credit insurance are also made if non-recourse factoring is used.
These will range from 0.5% to 2% of turnover depending on the level of risk the factor assigns the
arrangement
e. Arrangement Fee or Commitment Fee. There may be an arrangement fee or commitment fee.
Normally, an arrangement fee refers to a one off fee that is paid and not refunded whilst a
commitment fee may be refunded after commencement. You should question the factor about the
exact nature of such fees

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Understanding the Funding Proposition for Invoice Factoring or Discounting
Calculation of Availability
On commencement of an invoice factoring or discounting agreement the finance provider will make
available an early payment or prepayment percentage of your agreed outstanding sales ledger
which provides the initial cash injection on day one.
From that point onward you simply notify the value of the sales invoices that you have raised each
day, week or month. Based on the invoice values and cash received, the factor will create available
finance for you to use as you required.
It is not uncommon as the facility develops to be notified by the factor that certain invoices are
"unapproved" for funding. These "unapproved invoices" will affect the actual level of funding that
you are able to access and may include invoices still outstanding after 90 days or invoices raised in
advance of delivery. It is essential to question the factor about how they calculate the available level
of funding and understand the implications for your business.
In addition to the above, the invoice factoring or discounting facility may be subject to a restriction
against major debtors (prime debtor restriction or concentration reserve) or there may be
individual funding limits imposed in respect of each debtor, or credit limits if your facility is non
recourse (meaning it includes bad debt protection).
If your agreement is for recourse factoring, there will be a recourse period after which funding is
withdrawn. If it is non recourse, there will be a period after which the factoring company will pay
the balance of any covered debt to you under the terms of the bad debt protection that they are
providing (note for further detail on recourse and non-recourse factoring).
The invoice factoring or discounting funding terms may also state the maximum value of the facility
often known as a 'payment ceiling' or 'refer limit'. This is the maximum level of liability to the factor
that you may reach at any time. Bear in mind that this is only the maximum ceiling and does not
reflect the level of funding that you can expect to receive.

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Security Required By an Invoice Factor or Discounter
The main security that an invoice factor or discounter has is based on the trade debtors of the
business which are assigned under the terms of the financing agreement.
However, it is also common for secondary security to be supplied in the form of director's
warranties/guarantees.
Director's unsupported personal guarantees are occasionally requested to support the agreement.
'Unsupported' being a personal assurance to the value of £ X and not the charging of specific
personal assets.
It is often the misconception of directors that where personal guarantees are provided this is
merely to assure assistance to the factor/discounter in collecting in debts should the company
cease to trade. Whilst this guarantee certainly gives the factor the leverage to ask this of the
directors and is a significant motivating factor in their request of these assurances, it should be very
clear that a personal guarantee will give personal liability against the funds borrowed.
Whilst the factor/discounter will seek to collect monies in from debtors firstly they are fully
entitled to approach the directors for all or any of the amounts remaining outstanding.
Some factors will request director's warranties. These do provide director liability, although only in
certain circumstances detailed in the respective document. These often relate to circumstances
where fraudulent notification of invoices etc has occurred or cash has been misappropriated. As
such these are occasionally referred to as fraud warranties.
If you are unsure about the extent of your liability consult your solicitor before signing anything
that provides any personal warranty or guarantee.

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Business finance glossary of terms
Administration Charge
A charge by the factor on each invoice for the provision of the service.
Advance Billing
An invoice raised in advance of the provision of the service to which it relates.
Aged Debtors Ledger
A listing of outstanding balances per customer and split by either the month in which the respective
invoices where raised or the dates they become due.
Agency Discounting
Also referred to as disclosed invoice discounting. Where customers are aware of the factors
involvement, but the company maintain the responsibility of managing their sales ledger.
Approved Debtor / Balance
A customer approved by the factor for the advance of the agreed prepayment.
Asset Backed Lending
Lending by an institution where specific security is provided i.e. invoice finance, asset finance (HP
and leasing), stock finance. Opposed to lending under a blanket charge or debenture.
Assignment
The transfer of rights and benefit.

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Associated Company
To a factor these include; Parent Companies, Subsidiary Companies, Companies with Common
Shareholders, Companies with Common Directors, Franchisees.
Audit
An audit of the company's systems and debtors will be completed by the factor (usually every three
months). Ensuring continuing satisfaction with their security position. May also be terminology as
per 'survey' i.e. initial survey of systems and debt prior to the factor making a formal offer of
facility.
Availability
The amount remaining available to draw from the invoice finance facility, considering advances
may already have been made.
BACS Payment
Bank Automated Clearing System. A payment made or received through this system. Payments will
generally take 3 days to reach the recipient.
Bad Debt
An outstanding debt that will not be paid, most often given the cessation of the company invoiced.
Ban on Assignment (BOA)
A clause within a supplier's terms of trade that specifically bans the assignment of the benefits or
proceeds of the sale or contract.
Base Rate
Base funding percentage above which an additional margin is added by the respective lender. All
UK clearing banks currently operate with the same base rate determined by the Bank of England.

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CIS Certificate
Contractors within the construction industry are required by the Inland Revenue to deduct tax
when paying sub-contractors. Only if the sub-contractor has the necessary CIS certification can the
deduction be avoided.
This is therefore of relevance to a factor, if invoices they have financed are liable to deduction by
the customer (contractor).
The factor's security being eroded. Very simply: * CIS 5 certificate permits gross payment by the
customer * CIS 6 certificate permits payment gross to the company, but not to a third party, such as
a factor. * CIS 4 requires deductions of tax to be made by the customer. If the nature of the
company's business is subject to construction industry taxation then the particular certificate held
will determine which factors are willing to be of assistance.
Client
A company making use of a factor's service.
Collectability
The ease of collecting in the full value of outstanding trade debts in the hypothetical situation that
the company has ceased to trade. Affected by such issues as proof of delivery, disputes, contractual
obligations etc.
Concentration
Used in reference to the spread of customers by balances outstanding. Some factors will apply a
concentration limit, whereby should a single debtor exceed an agreed percentage of the total gross
sales ledger at any one time then the amount above this limit would become 'unapproved'.

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Confidential Factoring
An alternative expression for confidential invoice discounting. Some factors are considering the
provision of a true confidential factoring facility. That is, whereby the factor will complete the credit
control responsibilities, albeit as if they were the company.
Confidential Invoice Discounting
An invoice finance facility where the factors involvement is not disclosed and therefore remains
confidential from the company's customers. Also the credit management of the company remains
its own responsibility.
Consignment Stock
Goods provided to a customer for which payment is required only once they have been sold on.
Constructive Delivery
Goods held for a customer that have already been invoiced but have not been delivered but stored
on their behalf.
Contra Account
A customer that is also a supplier to the company.
Contractual Sales
Sales made within an over-riding supply agreement with the customer.
Control Account Summary
A monthly reconciliation of sales, credit note, receipts, adjustments completed by invoice
discounting clients for the factor to check against their records.

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Correspondent Factor
An overseas factor that is prepared to work with a UK factor to assist with the collection of export
debts. The reverse can also be true, that is a UK factor being the correspondent factor.
CPE - Credit Protection Element
The proportion of the administration charge applied to cover the provision of bad debt protection.
Current Account (Invoice Finance)
An account maintained by the factor in the name of the client for the recording of all transactions
between the factor and the client.
Debenture
A 'blanket' charge over all business assets registered at Companies House.
Debtor Credit Limit
Individual customers may be given a credit limit by the factor above which balances will become
unapproved.
Dilution
At any given time a debtor book against which the factor is advancing against will contain an
element of debt that is likely to be subject to credit notes, discount rebate or adjustments. The
factor will wish to establish this as part of agreeing the prepayment percentage advance against the
debtor ledger.

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Directors Warranty
Director's indemnity giving liability in the event of the company breaching specific clauses within
the invoice finance agreement. These usually relate to the fraudulent notification of debt.
Disclosed Invoice Discounting
An invoice finance facility that is disclosed to the customers of the company by way of a note on the
company's invoices. Unlike factoring the credit management remains the responsibility of the
company.
Discount Charge
Interest charge.
Discretionary Debtor Credit Limit
A minimum credit limit applied to all customers irrespective any individual credit search
information.
Dispute
A balance or invoice not accepted by the customer.
Doubtful Debt
A debt that has become doubtful that settlement will be made, given dispute or the viability of the
customer.
Drawdown
A request to the factor to transfer available funds from the invoice finance account to the company's
trading bank account.

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Dunning Cycle
This is industry terminology for the process and timescale of reminder letters, phone calls etc used
by the factor in the collection of outstanding invoices.
Export
The sale of goods or services whereby the customer company invoiced is outside the UK. Note this
may still be relevant if UK to UK supply but invoiced to an overseas registered company.
Export Factor
As correspondent factor. See above.
Factor
A supplier of factoring or invoice discounting.
Factoring
An invoice finance facility including the provision of a credit management service by the factor on
behalf of the company. A factor's involvement is disclosed to the customer.
Factors & Discounters Association
A members association acting on behalf of factors to promote their interests and the use of invoice
finance.
Fixed Charge
A specific charge against a named asset (i.e. debtors), registered at Companies House.

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Fixed Fee
Occasionally a factor will proved a fixed monthly / annual administration charge, as opposed to a
percentage fee.
Free Issue Material
Any material which is supplied by the customer to the company free of charge i.e. it will not feature
in the trade creditor's ledger.
Funding Limit
A 'review' limit may be applied to an invoice finance facility. It may therefore be possible that this is
lower than the total availability generated based on the company's outstanding debtors ledger and
agreed prepayment percentage. Often arises where sales grow faster than anticipated. Formal
approval by the factor should see this review limit increased.
Gross Turnover
Sales including VAT.
Ineligible Balance
A proportion of the sales ledger against which the factor will not provide finance against. See also
Unapproved Debt.
Invoice Batch
The notification to the factor of a number of invoices.

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Invoice Finance
The general term for either factoring or invoice discounting. A flexible and revolving finance facility,
providing cash for working capital and other business uses by utilizing a company's outstanding,
unpaid customer invoices as security for the lender.
Loan Subordination / Postponement
The agreement by directors or associated businesses of the company not to withdraw loan money
invested in the company unless agreed to by the factor. The subordination of loans can often give
the factor comfort to assume these as 'quasi' capital.
Maximum Extension Period
Period beyond the invoiced terms of trade at which, under a non recourse (insured) facility, the
factor will settle the outstanding customer invoice. Note, not relevant where a customer dispute
exists. Not all factors non recourse terms allow for this 'protracted default' cover.
Minimum Administration Charge
A minimum charge applied to the administration charge assessed annually. Should the percentage
administration charge applied to gross turnover result in the payment of charges below the
minimum charge then the company will be required to pay the difference.
Minimum Period
The minimum period of an invoice finance agreement. Usually 12 months. Termination of the
agreement by the company before the minimum period expires will result in the factor applying an
early termination penalty charge.
Net Worth
The net asset position of the company. Total company assets less total company liabilities. Capital
account in the case of sole traders and partnerships.

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Non Recourse
Without recourse to the company. An invoice finance facility provided where the company's
debtors are insured by the factor. Debts are therefore at the factor's risk, within agreed credit
limits, once notified to them. Company risk remains in the event of a customer dispute.
Notification
The advice of new sales invoices / values to the factor to update the sales ledger and availability.
Offer
An offer of facility by the factor to the company. Care in that some offers can still be subject to
certain conditions such as a satisfactory survey, credit approval and are therefore little more than
an indication of facility. The majority though are formal offers.
Open Item Sale Ledger
The accounting for of sales by which all outstanding, invoices and credit notes are detailed, as
opposed to balances only.
Overpayment
The agreed payment by the factor to the company of funds, although above the funding limit or
agreed prepayment percentage.
Preferential Creditor
Crown creditors. HMC&E (VAT) and Inland Revenue (PAYE)
Prepayment
Percentage advance of finance against the value of outstanding debtors.

33
Prime Debtor
Company's largest debtor by value of the total balance outstanding, as per concentration.
Proof of Delivery (POD)
An important document for the factor let alone the company. Substantially assists 'collectability'
(see above). Includes customer signed delivery note, carrier note, timesheet, weighbridge ticket etc.
Protracted Default
Some factors non recourse (insured) terms include for payment to the company of balances
outstanding having reached an agreed period (Maximum Extension Period) still unpaid. This may
be in the region of 120 - 180 days from the original due date for payment of the invoice. Does not
include for issues of customer dispute.
Receivable
Debtor balance. 'Receivables Finance' - US terminology for invoice finance.
Reconciliation
Balancing of invoice discounting notifications. Provided monthly by the company to the factor. See
Control Account Summary
Recourse
The right of a factor to return invoices should the debt proves to be a bad or doubtful debt. The
business risk is therefore that of the company.
Recourse Period
The period that invoices are financed for before being recoursed back to the company. This is
typically 90 or 120 days. In practice this is held as a reserve against the current ledger rather than a
physical return of funds.

34
Re-Factoring Fee
An additional charge applied by some factors, under a factoring facility to the value of invoices
recoursed (see above). This is usually those older than 90 or 120 days.
Retention of Title (ROT)
A clause contained in terms and conditions of sale which reserves title to the goods until payment is
received. This may include the right to the proceeds of the sale of the goods.
Retrospective Rebate
A volume discount given to customers.
Scheduled Order
An order received from a customer specifying delivery of various quantities over a given period.
Self Billing
An invoice raised by a customer, for payment by the customer to their supplier.
Settlement Discount
A rebate allowed against the gross value of an invoice for settlement within a given period.
Special Retention
An amount of the sales ledger set aside for which the factor will not permit finance against. Unlike
an unapproved balance this does not relate to a specific sales ledger balance, but another reason
specified by the factor.

35
Stage Payment
The payment for a particular order in stages i.e. 30% on order, 60% on delivery 10% after 30 days.
Survey
An audit is very often complete by the factor of the company's systems and debtors before
approving the provision and terms of an invoice finance facility. Usually completed at the premises
of the company.
Take On
The commencement of the invoice finance facility.
Take On Balance
The sales ledger balance at the commencement of the facility against which the factor will provide
finance.
Termination Period
Period of notice required to be given by the company to the factor as notice of their intent to cease
their invoice finance agreement. Usually subject to an initial minimum period of the agreement.
Trade Creditor
A supplier to the company with who balances are outstanding under credit payment terms for
settlement of outstanding invoices.
Trade Debtor
A business customer of the company with who balances are outstanding under credit payment
terms for settlement of outstanding invoices.

36
Transfer Charge
The charge made for drawing funds from your invoice finance facility to the company's trading
account.
Trust Account
The invoice finance 'bank' account
Unapproved Debt
Trade debt that is not approved for funding by the factor i.e. the prepayment is not permitted
against this element of debt.
Unprocessed Balances
The total value of any invoice notifications still waiting to be processed by the factor.
Value Date
The date receipts are considered accepted by the factor for the purposes of calculating interest
charges.
Waiver of Book Debts
A factor will require the agreement of any existing charge holder (i.e. company's bankers) to waive
their interest in respect of debtors.
Work In Progress
Work undertaken for a customer on an ongoing basis where invoices are raised for measured or
estimated work completed to date.

Guide to Factoring and Invoice Discounting

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Guide to Factoring and Invoice Discounting