What lenders actually check in your sales ledger

When you apply for an invoice finance facility, the lender is not really lending against your business. They are lending against your sales ledger. That ledger is the collateral, so it gets read far more carefully than most directors expect. An underwriter will spend hours inside your aged debtor report, your invoicing history and your credit control before a single pound is advanced.

This is a behind-the-scenes guide to what that underwriter actually examines, and how to tidy your book before you apply. Get it right and you secure a higher advance rate and a lower fee, rather than a decline or an advance rate that leaves cash trapped in the ledger.

The aged debtor report and what ageing reveals

The first document any underwriter opens is your aged debtor report, usually split into current, 30, 60 and 90 days plus. A healthy book has the vast majority of the value in the current and 30 day columns. A long tail beyond 90 days signals one of three things: customers who cannot pay, invoices in dispute, or credit control that has gone quiet. All three reduce the value of the ledger, and because most facilities will not fund anything past 90 days, that tail is effectively worthless as collateral.

Dilution and why it caps your advance rate

Dilution is the single most important number in sales-ledger underwriting, and the one directors understand least. It measures the gap between what you invoice and what actually gets collected in cash: credit notes, returns, rebates, volume discounts, early-settlement discounts and write-offs.

If you raise £100,000 of invoices in a month but £8,000 comes back as credit notes and rebates, your dilution is 8%. The lender never collects that £8,000, so they will not fund it. A book with 2% to 3% dilution supports an advance rate of 90% comfortably, while a book running at 10% is capped well below that.

Your advance rate is not a reward for being a good business. It is a mirror of your dilution. Lower the dilution and the advance rate follows.

Debtor spread and concentration

A book of thirty roughly equal customers is far stronger collateral than one of the same value where a single customer is 45% of the total, because if that customer fails a large chunk of the security vanishes at once. Most lenders apply a concentration cap, commonly funding no more than 25% of the ledger against any single debtor, so a well-spread book keeps the whole ledger working for you.

Contra accounts and billing for work not yet done

A contra situation is where a customer is also one of your suppliers. You owe them and they owe you, and the risk is that the two balances get netted off, so a funded invoice is settled by cancelling a debt rather than by cash arriving. Underwriters look hard for contras and usually exclude the contra element from funding, so flag any such customer upfront.

Underwriters are equally wary of invoicing in advance. Invoice finance funds money genuinely owed for goods delivered or services completed, not work you have not done yet, because a debtor can legitimately refuse to pay if the work is incomplete. Pre-billing, stage invoices and deposits raised before delivery all worry a lender, and sectors with milestone billing, retentions or applications for payment need a specialist who understands that model.

Average terms versus actual days-to-pay

An underwriter calculates your true debtor days and compares them to your stated terms. If you invoice on 30 day terms but customers routinely pay in 65 days, the lender prices for 65. Long payment cycles tie up the facility and risk debt drifting past the 90 day funding limit, so terms that match reality make for a cheaper facility.

Verification, the audit trail and credit control

Behind every invoice the lender wants proof that the debt is real and undisputed. This is the audit trail, checked at the start and periodically thereafter. A strong audit trail links each invoice to:

• A purchase order or written instruction from the customer
• Proof of delivery, a signed delivery note or a completion sign-off
• Signed timesheets where you bill for labour or contractors
• A clean, itemised invoice that matches the order

Where the paperwork is complete, verification is quick. Where invoices float free of supporting documents, the underwriter assumes the worst and prices for it. Alongside this they form a view of your credit control: whether you reconcile promptly, raise credit notes cleanly, follow up on late payers and keep the ledger reconciled to the bank.

The pre-facility survey and a worked example

Before the facility goes live the lender carries out a pre-facility survey, sometimes called a new-client audit. An auditor tests a sample of invoices end to end against the audit trail, reviews your dilution history, checks your top debtors and confirms there are no undisclosed contras or bans on assignment in your contracts. It sets your opening advance rate and your fee.

Consider a business with a £600,000 sales ledger applying for invoice discounting. At the survey the auditor finds dilution running at 8%, driven by credit notes for short deliveries and a generous early-settlement discount. To protect itself the lender sets the advance rate at 82%, funding £492,000 and leaving £108,000 trapped in the unfunded balance.

Over the next two quarters the business tightens up. It fixes the delivery errors causing credit notes and withdraws the blanket early-settlement discount, and dilution falls to 3%. At the next review the lender lifts the advance rate to 90%, so the same £600,000 ledger now funds £540,000. Reducing dilution by five percentage points released roughly £48,000 of additional working capital, with no extra borrowing and no new customers.

A checklist to tidy your ledger before you apply

Work through this before you go to market and you will present a book that earns a better advance rate and terms.

1. Pull a twelve-month aged debtor report and clear or write off genuinely dead debt past 90 days.
2. Calculate your dilution honestly over the last twelve months and identify the top two causes.
3. Reduce avoidable credit notes by fixing the operational errors that create them.
4. Review early-settlement and volume discounts and remove any that no longer earn their keep.
5. List any customers who are also suppliers and disclose these contras upfront.
6. Check your customer contracts for any ban on assignment of invoices.
7. Make sure every invoice can be tied to a purchase order and proof of delivery or a signed timesheet.
8. Reconcile the ledger to the bank and allocate any unallocated cash.
9. Map your debtor spread and note any single customer above 25% of the book.

Sales-ledger underwriting is not a mystery. It is a systematic read of ageing, dilution, spread, payment behaviour, contras, billing practice and admin, and every one of those is something you can influence before you apply. For a candid view of how your ledger will read to an underwriter, speak to our invoice finance team. As a commercial finance broker we are not regulated by the FCA, which is correct for business-to-business commercial finance, and we cover the specialist invoice finance lenders who price each book on its real strengths.