Glossary

BACS

A method of electronic payment. The initials stand for ‘Bankers Automated Clearing System’. Using this system, funds may be transferred from the invoice financiers account to the client. providers account to your own bank account via this system. Although many banks now adopt a ‘faster payments’ policy for online payments, BACS payments can take up to three working days to clear.

Bad Debt

Normally a debt that has not been collected because of protracted default and/or insolvency of the debtor. The precise definition of bad debt is set out in the debt purchase agreement.

Bad Debt Protection

A general term for the mechanism to mitigate the impact of bad debts. Provided as part of either a recourse or non-recourse invoice finance facility, it is underwritten by the financier or by a third-party credit insurer. Normally provided subject to varying terms and conditions. The term is sometimes used interchangeably with credit protection but, technically, credit protection should be used where there is a specific credit insurance policy provided by a third party, with bad debt protection normally being provided by the financier.

Ban on Assignment

This is an old clause in a contract of sale, prohibiting a business from assigning the benefit of the contract, restricting businesses from assigning debts to invoice finance lenders. This is often seen in outdated construction contracts. However, The Business Contract Terms (Assignment of Receivables) Regulations 2018 came into force on 31 December 2018 meaning that parties to a contract in the UK may no longer be able to prohibit the assignment of receivables.

Blanket Cover

A minimum credit limit that an invoice financier will apply to all debtors, subject to no adverse credit information against a debtor.

Book Debts

The amounts of money that are due or owed to a business by its debtors. Also known as Accounts receivable or sales invoice.

Cashflow

The measure of a business’s current financial health calculated by cash receipts, less cash payments over a specific period in time.

CHAPS

A form of payment for same day transactions from an invoice financier to a client. It stands for Clearing House Automated Payment System.

CHOCC

Client Handles Own Credit Control. This is a hybrid between invoice factoring and invoice discounting. The facility is disclosed and the financier issues monthly statements. However, the client undertakes the credit control function.

Client Account

This is the value due to the client of the sales ledger if all debts were paid immediately. It is calculated by deducting the funds in use (current account) from the sales ledger account.

Collections

These are the payments an invoice financier receives from a client’s debtors.

Collect out Fee

An additional contractual fee charged to cover all the costs and expenses involved in collecting a sales ledger following the insolvency of a client. This is often charged as a percentage of the sales ledger at the time of the insolvency process.

Concentration Limit

This represents the maximum amount of funding an invoice financier will provide against a specific debtor. Also known as high involvement. It is often expressed as a percentage, calculated as the proportion of the value of the debts for one debtor, against all outstanding or approved debts. A concentration limit can also be applied to categorise a sale ledger by an industry sector, such as construction, or export debt.

Confidential Facility

An invoice financing facility where the debtor is not notified of the assignment of the debt to the invoice financier. It is also known as an undisclosed facility.

Contra Trading

This is where a business buys from and sells to the same debtor. This is monitored by lenders due to the potential offset that can occur. An invoice financier would make explicit provisions in the debt purchase agreement regarding contra trading.

Contract of Sale

The agreement between the client/customer and the debtor for the supply of goods or services. It is also referred to as a supply contract.

Covenant

This is an agreement to do or not to do something which would be part of the debt purchase agreement. A breach of a covenant can lead to restrictions on funding and could lead to a lender terminating the facility.

Credit Limit

This is the maximum value of outstanding debts due within a client-debtor relationship that an invoice financier will fund to.

Credit Note

This is an accounting document that reduces or extinguishes the value of an associated invoice. Invoice finance lenders monitor such accounting activity as it reduces the value of the invoice they could have potentially already funded. A credit note is also referred to as a dilution..

Credit Protection
This allows a business to protect against bad debts using an insurance policy which may be taken out by a client or a financier and which provides cover for outstanding debts in defined circumstances of non-payment, default or insolvency.

Credit Terms

These are also referred to as payment terms. This is the length of time a client allows for a debtor to pay.

Current Account

This is the balance that is owed to the invoice financier at a given point in time. It comprises the value of all prepayments, fees and charges, at any time, less debtor payments. It is also variously referred to as funds in use or payment account. This is the figure in which a new invoice financier must settle the old invoice financier when conducting an inter factor transfer.

Debenture

A form of security document that creates fixed and floating charges over all the assets of the entity against which security is being taken. Most invoice finance lenders require a charge over what they are lending against – the book debts.

Debt

The monetary obligations owed by one entity to another in payment for the supply of goods or services.

Debt Collection

The collection of unpaid debts. This would usually form part of the services offered by a financier under a factoring facility. It can also include legal action from a debt recovery agent.

Debt Purchase Agreement

This legal agreement refers to the sale and purchase of a client’s debts by the financier. It is also sometimes referred to as an invoice finance agreement, a receivables finance agreement or a sales finance agreement.

Debt Turn

The average length of time taken for debts to be paid. It is often referred to as Days Sales Outstanding (DSO) and debtor days. This is calculated in different ways, the easiest being current ledger / annual sales x 365 days. This figure can fluctuate depending on the time it takes debtors to pay.

Debt Verification

The process undertaken by an invoice financier to confirm whether invoices have been received by the debtor and are accurate. It can include written or telephone contact with the debtor.

Debtor

A business that has been supplied with goods or services and has been invoiced by the client. Sometimes referred to as ‘customer’.

Dilution

This is something that can reduce the value of an outstanding invoice after the invoice has been raised. Excluding the default of the debtor. Debit and credit notes, early settlement discounts, deductions, retentions, set-offs (see contra trading) and other adjustments are referred to as dilutions. Invoice financier do not like too many dilutions as it impacts their facility & security.

Direct Banking

Involves the deliberate banking of a debt being paid by the client into a bank account other than the account specified by the invoice financier. This is a breach of any invoice finance arrangement and can also be referred to as banking cash.

Direct Payment

This is a payment by a debtor into a bank account other than that specified by the financier. These funds should be transferred by the client to the specified account immediately. If not, the lender could deem this to be a breach of the facility.

Disapproved Debt

This is debt that is that is not approved for funding. This can be for many different reasons. However, they all have the same affect and reduce availability from the invoice finance facility by removing debt from the funding calculation. Examples, include debts that fall outside of specific criteria such as a funding limit, concentration limit, disputes, ageing etc.

Discount Charge / Discount Fee / Discount Rate

A headline charge from an invoice financier against the funds in use, typically calculated in a similar way to interest, at a margin over a base-rate. This charge only applies to an invoice finance arrangement if the client is borrowing from the facility. It is only charged against a clients average borrowing / funds in use. With most invoice financiers, it is calculated daily.

Domestic Factoring

This is a form of factoring where both the client and the debtor are based in the country of the invoice financier. No export debt is present on the sales ledger.

Excluded Debt

These are debts in which the client and invoice financier have agreed to exclude from the debt purchase agreement.

Export Debt

A debt which is payable by a debtor who is outside the country of the client.

Export Factoring

A form of factoring in which the client, assigns debts due from debtors based in another country.

Facility Limit

The maximum amount that an invoice financier is prepared to provide to a client at any time under a particular funding facility. Known by a variety of different terms, including funding limit, finance limit, review limit, refer limit, ceiling limit, maximum available funds in use etc.

Factoring

A form of invoice finance that involves the assignment of outstanding debts by a client to an invoice financier. It is provided by an invoice financier (or factor), that purchases the debts, manages the client’s sales ledger, provides credit control services, and usually collect debts in the factor’s name. The notice of assignment is fully disclosed to the debtor.

Factoring Company

An invoice financier that provides funding against invoices and can also manage the sales ledger.

Funding Period

The length of time in which an invoice financier will provide funding against a debt, normally defined in the debt purchase agreement as a recourse period. If the debt remains unpaid after this, the debt becomes aged and would likely be disapproved. Sometimes an invoice financier can offer funding for a further period subject to negotiation.

Future Debt

This is a debt/receivable which comes into existence after the commencement of a debt purchase agreement and is normally covered by that agreement.

Import Factoring

A form of factoring where an export debt is managed and collected by an import factor based in the same country as the debtor. Import and export factoring are collectively referred to as international factoring.

Inter Factor Transfer

This involves the transfer of a client from one invoice financier to another. A standard set of procedures and letters (inter-member transfer letters) is normally used by members of the UK Finance to facilitate the smooth transfer.

Invoice

A document from the client that details the payment required for goods or services that have been provided to a debtor.

Invoice Date

The date of which the invoice is raised.

Invoice Discounting

A form of invoice finance that involves the assignment of outstanding debts by a client to an invoice financier. It is provided by a financial entity that may be called an invoice discounter who purchases the debts, but the client is responsible for sales ledger management and the collection of its own debts. Invoice discounting can either be disclosed or confidential. However, it is often confidential.

Letter of Credit (LOC)

This is a written commitment by a bank issued after a request by an importer that payment will be made to the exporter provided that the t&c’s are met.

Management Buy In (MBI)

A type of business acquisition where a new management team from outside of the company raises the necessary finance, buys the assets and shares of the business and becomes the new owners.

Management Buy Out (MBO)

The existing management team assumes control of the company after purchasing its shares or assets.

Minimum Period

The minimum length of time a financing arrangement must be in place before either party may terminate it. This may be distinct from the notice period.

Monthly Minimum Fee

A monetary value charge applied to the client if they do not notify a certain value of invoices in a month. Sometimes, invoice financiers can charge this quarterly, annually or even waive completely.

Non-Notifiable Debt

A debt or receivable where the title is not transferred to an invoice financier. However, it is usually held on trust for the financier by the client to provide additional security.

Notice Of Assignment

A notice that can be issued by an invoice financier or its client/customer to a debtor, informing the debtor that the debts or receivables payable have been assigned to the financier and that payment should be made to them. Also known as a disclosure notice. A general notice of assignment can be given to a client’s debtors before the commencement of a debt purchase agreement.

Notice Period

The contractual notice period which must be given by either party before a facility can be terminated. It is normally linked to, but distinct from, a specified minimum period.

Notifiable Debt

This is the process where the client informs the invoice financier that a debt has been created (or a credit note has been issued). The notification includes the value of the debt, which is used as the basis for funding calculations.

Notification

This is the process where the client informs the invoice financier that a debt has been created (or a credit note has been issued). The notification includes the value of the debt, which is used as the basis for funding calculations.

On Account Cash

This is when an invoice financier cannot allocate a payment received from a debtor against a specific invoice. Sometimes such debt can be held in what an invoice financier calls a suspense account.

Overpayment

This is the amount by which funds drawn down under an invoice finance facility exceed availability or a facility limit. Over payments can be agreed and approved by the financier in advance, under certain circumstances.

Personal Guarantee

This is a form of security taken personally against the directors of the business to be called upon in the event the funder is unable to collect funds from debtors or business.

Pre-Invoicing

When an invoice is issued prior to goods or services being delivered to the debtor. Lenders often like the invoice to be raised after the goods and services have been delivered.

Pre-payment

Often referred to as ‘advance’ this is a percentage of an invoice of which a client can borrow against. The balance would usually be paid when the debt is paid by the debtor.

Proforma Invoice

An invoice to be settled straightaway with no payment terms.

Purchase Ledger

The ledger that shows all the outstanding purchase invoices due to creditors. Also known as an aged creditors list.

Re-assignment

Involves the transfer of ownership of an assigned debt from the invoice financier back to the client.

Recourse Period

This is how long an invoice financier will fund invoices for. When lenders work with a recourse period, the risk of non-payment by the debtors remains with the client. The financier retains the ability to recourse (transfer) the debt back to the client if it remains unpaid. A non-recourse invoice finance facility is where the invoice financier has limited rights to recourse the debt, which provides the client with defined protection against non-payment.

Refactoring Fee

This is a fee associated with the invoice finance facility payable by the client for their debtors paying later than the specific recourse period set out but the debt purchase agreement. Such charge is not associated with all facilities and lenders.

Remittance Advice

A confirmation document from a debtor detailing which invoices are to be paid in the debtors next payment run.

Reserves

Also known as retentions, either a calculated amount based upon invoices or debtors that fall outside of the funding criteria. Invoice financiers sometime reserve funding for added security.

Retention of Title (ROT)

A claim of retention of ownership by a supplier of goods until payment has been made to them or certain conditions have been met. This provides suppliers with a form of security against their customer’s default or insolvency. ROT can sometimes restrict the ability of an invoice financier to provide funding.

Sales Ledger

This is the amount owed to a client by its debtors. It comprises the sum of all outstanding invoices and is often split into monthly columns to identify the age of invoices.

Service Charge

This is the charge made by an invoice financier for the provision of the facility. It is usually charged as a percentage of the value of invoices assigned to the lender.

Schedules

A listing of all the invoices that are being sent to an invoice financier. Information on a schedule includes details such as customer name, code, amount and date etc.

SME

Small and medium sized enterprises

Staged Payments

This is when an invoice is raised by a business for work completed in stages, but prior to the completion of all of the work detailed on the original purchase order.

Supplier Finance

This is also referred to as purchase order finance or reverse factoring. Invoices from a supplier would often be paid at a discount by a financier as soon as they were approved by the debtor, with the financier receiving payment from the debtor when the invoice is due. The finance is effectively provided against the debtor’s credit rating rather than the suppliers.

Take On

This is the process whereby a sales ledger is verified and loaded on to an invoice financier’s portal in preparation for the facility to be made live.

Take On Debt

The value of the sales ledger which exist at the commencement date of the facility.

Termination Event

Any event which entitles either party to take certain action including terminating a facility or accelerating repayment of a facility. It can arise from a breach of the facility, insolvency, failure to meet financial tests, or the occurrence of an adverse event. Reasons for termination will be highlighted within the debt purchase agreement.

Termination Fee

This is the fee charged to the client where the agreement is terminated prior to its agreed term.
These fees are determined by the loss of income or cost to the financier of the agreement not running the length of the contract. Termination fees are often defined in the terms and conditions. They are sometimes known as break fees.

Trade Finance

Funding facility available which enables a business to pay suppliers while waiting for debtors to pay. Often used to pay suppliers sooner and can work alongside an invoice finance facility.

Trust Account

A bank account in the name of a client, the proceeds of which are held on trust for the invoice financier. This account is controlled by the invoice financier and the client has no rights to access it.

Undisclosed Factoring

This is a form of factoring which does not require notice of assignment to be given to debtors until the factor decides that notice must be delivered. It is also known as Confidential Factoring.

Working Capital

The immediate cash that a business has available to spend to trade efficiently. This is calculated by deducting current liabilities from current assets.