Invoice Financing: Key Terms and Definitions

As independent experts, it’s part of our job to cut through the jargon that comes with invoice finance and get business owners to the best products and deals for their individual circumstances.

If you’re just starting to consider invoice finance for your business, we’ve put together a handy glossary for the most important products and other terms you’re likely to encounter.

Ready to unlock the business benefits of invoice financing? Speak to one of our specialists today. Our advice is 100% impartial and 100% free.

Understanding Invoice Financing

Most customers these days expect payment terms as part of a commercial contract. If you’re dealing with larger companies and sizable orders, it’s a buyer’s market, so you’re going to have to commit to their terms rather than your own. And if you can’t provide agreeable payment terms, your customer is likely to go elsewhere.

Of course, offering credit terms to customers ties up funds that could otherwise be put to good use in the business, whether that’s growing the team, investing in new equipment, or developing new products.

Invoice finance is a catch-all term for the various products on the market that allow businesses to boost their short-term liquidity and mitigate the cash flow problems that arise with large customer orders, slow-paying customers, or both. Essentially, it’s a form of short-term borrowing from a lender based on outstanding customer invoices (sometimes you’ll see the phrase ‘accounts receivable finance’ used for the same thing).

 

Invoice Finance: Key Takeaways

Invoice finance is an umbrella term for a set of financial products that allow a business to sell its unpaid invoices to a lender.

The sale of this collateral immediately releases working capital – typically 80% to 90% of the invoices’ value – directly into the business.

Invoice finance improves operational cash flow and can be used to speed up plans for business growth.

Depending on the invoice finance product, businesses can choose to hand over their credit control (including chasing invoices) to the lender or to keep it in-house.

Some products allow businesses to keep their invoice financing arrangements confidential from their clients/customers.
 

Invoice Finance: Glossary of Key Terms

Here’s our guide to some of the more common terms used in the invoice finance world. We haven’t tried to cover everything here, just the key phrases you’re likely to hear. For clarity, we’ve used ‘the company’ for the business using invoice finance, ‘the lender’ for the invoice finance provider, and ‘customers’ for the company’s debtors.

You can also find out more about individual invoice financing products by clicking the links below. If you get stuck, we’re here to help.

A

Accounts Receivable

The various monies owed by customers on credit terms.

Advance

The amount of money made available upfront from the sale of an invoice.

Advance rate

The agreed percentage of an unpaid invoice that will be made available as an advance.

B

Bad debt protection

An additional insurance policy, often included in the lender’s fees, to protect against customers’ inability to pay (including insolvency). Also referred to as credit protection.

Book debt

The sum of money owed by customers in the course of everyday business. Used as collateral in an invoice finance arrangement.

C

CHOCCS

A facility in which the Client Handles Own Credit Control Services. A CHOCCS facility sits somewhere between invoice factoring (the invoice finance arrangement is disclosed to customers) and invoice discounting (the company still chases its own invoices). Read more.

Concentration limit

The amount of debt an invoice finance lender will allow for a single debtor.

Confidential factoring

See invoice factoring – in this case, the lender will handle credit control, but the factoring arrangement is not disclosed to the company’s customers (the lender will assume the role of an ‘in-house’ credit controller). Read more.

D

Discount charge/fee

The cost of the borrowing itself, pre-agreed and paid to the lender as part of the invoice finance arrangement. Usually given as a percentage (similar to the interest rate on an overdraft facility).

I

Invoice discounting

An invoice finance arrangement where credit control is retained within the company and the arrangement is confidential, otherwise known as confidential invoice discounting (CID). Read more.

Invoice factoring

An invoice finance arrangement where credit control is outsourced to the lender. Read more.

Invoice finance

A catch-all term for a host of business finance products related to accounts receivable.

N

Non-recourse invoice factoring

A factoring agreement where the lender is responsible for any customer non-payments.

R

Recourse invoice factoring

A factoring agreement where the company is responsible for buying back any unrecouped invoice debts from the lender.

S

Selective invoice finance

An arrangement where, rather than handing over their entire accounts receivable, the company selects specific customers to fund. Read more.

Service charge/fee

The cost of running the invoice finance facility. Usually given as a percentage and charged against the company’s turnover.

Spot factoring

An ad-hoc factoring arrangement where the company does not have to enter into a long-term relationship with the lender. Also known as single-invoice factoring. Read more.

Got a question about invoice finance that we haven’t answered here? Talk to one of our specialists. Our advice is always 100% impartial and 100% free.