Invoice Finance Glossary
The following section details terms which are commonly associated with invoice finance.
If you are looking for a specific term, click one of the following links to go to the relevant section:
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Non-recourse invoice finance
With non-recourse invoice finance, the factoring or invoice discounting company takes on the risk of the bad debt in return for a higher service fee. It is like taking an insurance policy out against the risk of your customers not paying their invoices.
Your factoring agreement should give a fixed time period for the customer to pay their invoice, during which you pay interest on the total invoice value as normal. However if the customer does not pay in the allotted time, the invoice finance company takes on their debt, and you are not required to repay the advance.
The invoice finance company takes on the responsibility for chasing the customer for payment, and if necessary and court proceedings and resulting costs.
Overpayment
An advance, over and above, the prescribed level in the agreement. Often where overpayments are requested, there is a specific charge relating to this, which is typically negotiated when such a request is made.
Personal Guarantee
Security supplementary, to the obligation of a limited company, to repay sums advanced to it, whereby the party providing the guarantee, agrees to repay the factor, in the event the factor cannot recover its advances from invoices assigned.
Pre-invoicing
The name for invoices raised, before delivery of the goods or service, to which it relates. – Some companies may raise pro-forma invoices, where they require payment in advance. –Pre-invoicing is the term common in factoring or discounting, which is a serious breach of warranties defined in the agreement.
Pre-payment
The amount (set as a percentage) that the factor will advance its clients, against outstanding invoices
Recourse invoice finance
A recourse invoice finance deal means that the risk for bad debt rests with your company not the invoice finance company. The invoice finance company will be able to reclaim their money from you if your customers do not pay their outstanding invoices.
Usually a fixed period will be agreed in your contract after which time you will be required to pay back the advance. Even if you have to refund the advance, you still have to pay the fees for service and interest.
For this reason, recourse factoring and invoice discounting can be cheaper than non-recourse. There may also be fewer requirements concerning your customers and internal processes.
Recourse period
The period after which a factoring company requires its client to buy back uncollected invoices.
Re-factoring charge
A charge levied by the factor, against old uncollected invoices, to facilitate additional collection procedures
Receivables
Many companies, after having delivered goods or an agreed service, do not ask for cash on delivery but instead issue an invoice.
An invoice is a legal agreement where money is being requested for the goods or work performed.
In the UK the average invoice remains outstanding for between 55 and 60 days and thus most companies that operate on an invoicing basis have more than one invoice which they are yet to receive the payment for. These are called the company’s receivables.
References
It is custom and practice, for a factor to take references, from the outgoing factor, where there is an inter-factor handover.
Retention
A sum held back from availability, in respect of contingencies. – This can include Concentration limit retentions, or debtor balances, which exceed approved funding limits.
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