Invoice finance jargon, explained

Invoice finance offers and agreements are full of terms that lenders use every day and business owners rarely see. None of it is difficult once the words are unpacked, but a single unfamiliar phrase can make a straightforward offer feel opaque. This glossary sets out the terms you are most likely to meet, grouped by where they turn up, so you can read any facility document and know exactly what you are agreeing to.

We have kept each definition tight and accurate. Where a term has a common shorthand, that is noted too. The aim is simple. By the end you should be able to pick up a proposal, work through it line by line and understand every part of how the facility works and what it costs.

The facility

These terms describe the shape of the arrangement itself and how cash is released against your invoices.

• Invoice finance. The broad name for funding that releases cash tied up in your unpaid sales invoices. Factoring and invoice discounting are the two main forms.
• Factoring. A form of invoice finance where the lender advances cash against your invoices and also runs your credit control, collecting payment from your customers on your behalf. The arrangement is usually known to your customers.
• Invoice discounting. A form of invoice finance where the lender advances cash against your invoices but you keep collecting payment yourself. Your credit control team continues to chase and bank receipts as normal.
• Confidential invoice discounting, or CID. Invoice discounting run so that your customers are not told a lender is involved. You keep control of collections and the facility stays behind the scenes.
• Disclosed and undisclosed. Whether your customers are told the lender is involved. Factoring is disclosed. Confidential invoice discounting is undisclosed. Disclosed facilities usually show the lender on your invoices with a payment instruction.
• Whole turnover. A facility where your entire sales ledger is funded, rather than picking individual invoices. Most factoring and invoice discounting facilities are whole turnover.
• Selective or spot finance. A facility where you choose specific invoices or a single customer to fund, rather than the whole ledger. Useful when you only need to release cash occasionally.
• Prepayment. The cash paid to you up front when an invoice is funded, set by the advance rate. Often used to mean the same thing as the advance itself.
• Availability. The amount of cash you can currently draw. It is your funded ledger at the advance rate, less anything already drawn and less any amounts the lender is holding back.

Costs and fees

Invoice finance pricing has two main parts. A charge for the money you use and a charge for running the facility. These terms cover both, plus the fees that can appear elsewhere in an agreement.

Advance rate

The percentage of each invoice released to you up front. A rate of 85 per cent means you receive 85 pence of every pound invoiced straight away, with the rest held in reserve until your customer pays.

Reserve, or retention

The part of each invoice not advanced up front. It is released to you, less charges, once your customer settles the invoice. If the advance rate is 85 per cent, the reserve is the remaining 15 per cent.

Discount margin

The charge for the funds you actually use, quoted as a rate above a reference rate such as the Bank of England base rate. It works like interest and applies only to the balance you have drawn.

Service fee

The charge for running the facility, covering administration and, in a factoring arrangement, credit control and collections. It is usually a percentage of your funded turnover and is separate from the discount margin.

Refactoring fee

An extra charge that can apply when an invoice stays unpaid beyond the agreed recourse period. It reflects the added work and risk of an invoice that has run past its normal collection window.

Tip. When you compare two offers, add the discount margin and the service fee together and apply them to your real turnover and typical drawn balance. A low headline margin can sit next to a high service fee, so the total cost is what matters, not either number on its own.

Worked example. Say you raise an invoice for £10,000 with an advance rate of 85 per cent. You receive £8,500 straight away and £1,500 is held in reserve. When your customer pays the full £10,000, the lender releases the £1,500 reserve to you, less the discount margin on the £8,500 for the days it was outstanding and less the service fee on the invoice.

Your ledger and debtors

A lender funds against your sales ledger, so these terms describe your customers, your invoices and the reports the lender relies on.

• Sales ledger. The record of all money your customers owe you. It is the pool of invoices the facility funds against.
• Debtor. A customer who owes you money against an invoice. Lenders often refer to your customers as debtors throughout an agreement.
• Aged debtor report. A breakdown of what each customer owes, sorted by how long the invoices have been outstanding, typically in 30 day bands. Lenders review it to see how promptly you are paid.
• Dilution. Anything that reduces the value of an invoice after it is raised, such as credit notes, discounts, returns or short payments. High dilution means less of your ledger is reliably collectable.
• Debtor concentration. How much of your ledger sits with a few large customers. If one customer makes up a big share, the lender carries more risk if that customer stops paying.
• Concentration limit. A cap on how much funding the lender will give against any one customer, often set as a percentage of the total ledger. Balances above the cap simply are not funded.
• Verification. Checks the lender makes to confirm an invoice is genuine and the goods or services were delivered, sometimes by contacting your customer directly.
• Contra account. A situation where a customer is also your supplier, so they could set off what they owe you against what you owe them. Lenders usually restrict funding against contra customers.

Risk, security and recourse

These terms cover what happens if an invoice is not paid and the security a lender takes to support the facility.

• Recourse period. The number of days after an invoice due date, often around 90, during which the lender can hand an unpaid invoice back to you and reclaim the cash it advanced against it.
• Recourse. A facility where the risk of a customer not paying stays with you. If an invoice is not settled within the recourse period, you repay the advance.
• Non-recourse. A facility where the lender carries the risk of protected customer non-payment, usually alongside bad debt protection. It costs more than a recourse facility.
• Bad debt protection. Cover, built into the facility or bought alongside it, that pays out if a covered customer cannot pay because of insolvency. It has its own terms and limits per customer.
• Notice of assignment. Wording, often placed on your invoices, telling your customer that the invoice has been assigned to the lender and that payment should go to the lender. It appears in disclosed facilities.
• Trust account. A bank account, held in the lender's name, into which customer payments are made. It is common in confidential facilities so money reaches the lender while your identity stays behind the scenes.
• Debenture. A security document giving the lender a charge over your company's assets, including the sales ledger it is funding against. It is registered at Companies House.
• All-monies. A clause in security wording meaning the security covers everything you owe the lender, not only the invoice finance facility. Worth reading closely if you have other lending with the same provider.
• Termination or notice period. How much notice each side must give to end the facility, often several months, plus any minimum term. Ending early can trigger a fee, so check this before you sign.

Read this way, an invoice finance offer becomes far easier to judge. You can see how much cash each invoice releases, what the facility costs in total, how your customers are treated and what happens if an invoice turns bad. If a term in your paperwork is not covered here, or the wording still reads oddly, it is worth talking it through with a broker who works across the specialist invoice finance lenders. A short conversation can confirm you are comparing offers on the same basis and that the facility genuinely fits how your business trades. Speak to our invoice finance team whenever you would find that useful.