Is Your Debtor Book Fundable? What Invoice Financiers Look For, and the Invoices They Won't Fund

A business with $1 million of unpaid invoices might expect to borrow $800,000 against them. In practice, it's often much less. Not every invoice is eligible, some customers are limited, and the advance rate applies only to what's left.

With invoice finance, the financier is lending against your customers' ability to pay as much as yours. Understanding how they look at your debtor book helps you set realistic expectations, choose the right facility, and get more funding from the same ledger.

How Your Funding Is Worked Out

An illustrative example:

Figures are illustrative. In this example, the business can borrow 56% of its total ledger, not 80%.

Invoices Financiers Usually Won't Fund

• Old invoices. Invoices past a set age, commonly 90 days from invoice date, drop out of the eligible pool. Late payment is the single biggest warning sign for a financier.
• Related-party debts. Invoices to companies with common owners, directors or family links. The financier can't be confident they'd be paid if something went wrong.
• Progress claims and retentions. Common in construction. A progress claim isn't a debt for completed work in the same way, and it can be disputed or set off. Retentions aren't due until well after completion. Some specialist financiers will fund progress claims, but at lower advance rates.
• Contra accounts. Where you also buy from the customer, so they could set off what you owe them against what they owe you.
• Pre-billing. Invoices issued before the goods are delivered or the work is done.
• Disputed invoices and credit notes. Anything the customer is contesting.
• Overseas customers. Often excluded or limited, unless covered by trade credit insurance.
• Government and consumer debts. Some financiers exclude or limit these, because of payment processes or legal restrictions.

Concentration: Too Much Riding on One Customer

If one customer makes up a large share of your ledger, the financier is exposed to that one customer. Most facilities set a concentration limit, a maximum percentage of the eligible ledger that any single customer can make up, commonly somewhere around 20% to 30%. Anything above that isn't funded.

Financiers will often lift the limit for a strong customer, such as a listed company or a government agency, or where the debt is insured. If you have one or two major customers, raise this at the start, because it can make a large difference to your available funding.

Dilution: How Much of What You Bill Gets Paid

Dilution is the gap between what you invoice and what you actually collect, from credit notes, discounts, returns, disputes and bad debts. If you invoice $100,000 and collect $96,000, your dilution is 4%.

Low dilution supports a higher advance rate. High dilution, or dilution that's rising, leads to lower advance rates, more audits and tighter terms. Track your own dilution before you apply, so you can explain it.

What Else the Financier Checks

• Your customers' credit quality. The financier will credit check your larger customers, and may set a limit for each one.
• Your records. Accurate, up-to-date accounting with clean aged debtors reports, ideally from cloud accounting software the financier can connect to.
• Your contracts and terms. Clear payment terms, proof of delivery, and no clauses that stop invoices being assigned.
• Debtor verification. On a disclosed facility, the financier may contact customers to confirm invoices. Confidential facilities usually involve more audits instead.
• Your ATO position. An unmanaged tax debt is a risk, because of the ATO's powers to collect from the business.

Your Bank's Security

If your bank holds a general security agreement over the business, it already has a security interest in your receivables, registered on the PPSR. An invoice financier will need priority over those receivables, usually through a priority deed or a release from the bank. Talk to your bank early. Delays here are a common reason invoice finance facilities take longer than expected to settle.

How to Get More Funding From the Same Ledger

• Chase overdue invoices. Every invoice brought back under 90 days becomes fundable again.
• Invoice promptly. Invoice as soon as work is done or goods delivered, not at the end of the month.
• Separate retentions and progress claims. Keep them distinct from completed-work invoices so the eligible ledger is clear.
• Consider trade credit insurance. It can lift concentration limits and make overseas customers eligible.
• Negotiate customer limits upfront. Especially for your largest, strongest customers.

The cleaner your debtor book, the more you can borrow against it, and the cheaper it gets. Tidying up your ledger before you apply is one of the best returns on time you'll get.

How We Help

We review your aged debtors before approaching financiers, so you know what's likely to be eligible and how much you can realistically borrow. Then we match you to banks or specialist financiers whose eligibility rules suit your customer base, including those that fund construction progress claims or overseas debtors. See what invoice finance really costs, our invoice finance page and working capital finance.

Book a free, no-obligation consultation and we'll show you how much your debtor book could fund.