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• 08 May

  What Criteria Do Lenders Consider When Approving Invoice Finance

  What criteria do lenders consider when approving invoice finance? This article seeks to answer that question.

  What Criteria Do Lenders Consider When Approving Invoice Finance?

  Whilst some criteria apply when you apply for invoice finance they vary according to the product that you want. Factoring services are generally easier to qualify for and invoice discounting tends to be slightly harder to qualify for.

  Having said that, when compared to other forms of lending invoice finance is generally more available than many traditional banking facilities such as overdrafts and commercial loans.

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  Funders Versus Lenders

  Firstly, we should clarify a point. Invoice financing is not considered "lending", hence the providers are not "lenders". This term applies to facilities such as overdrafts and loans. This type of financing involves accelerating the payment of debts that were already owed to the business so there is no lending involved. We tend to refer to the providers as "funders".

  Criteria For Approving Invoice Financing

  Invoice financing can be an excellent way for UK businesses to improve cash flow and increase working capital. However, securing approval for this form of finance hinges on several key criteria that funders evaluate. Understanding these can enhance your chances of gaining access to necessary funds swiftly.

  Invoice Finance Criteria

  The invoice finance criteria that funders apply are generally as follows (see below for nuances between factoring and invoice discounting).

  Business Customers On Credit Terms

  Firstly, you need to sell either products or services to other businesses on credit terms. This is a fundamental principle of these products. Retail or cash sales are not eligible.

  Evidence Of Debts

  Your debts owed by your customers need to be solid and ultimately collectable. Evidence of debt will help enormously. If everything you sell is on sale or return terms, or you credit out large amounts due to disputes that can dilute the value of the debts and make your proposition less attractive to funders (some may still be able to help though).

  Funders like simple "sell and forget" products and services, preferably with some evidence of the debt, e.g., a signed timesheet for a temporary staff placement or a signed delivery note for the goods.

  Your invoices (or applications for payment) need to be correctly raised. See our notes on what invoices should contain.

  Size Criteria

  These vary according to the product that you choose. In general terms, there are facilities with no minimum size criteria applied so you can even finance single invoices on a one-off basis. For more details on factoring criteria or invoice finance criteria see our Invoice Finance Guide.

  Creditworthiness Of Your Customers

  A crucial factor in invoice finance approval is the creditworthiness of your debtors. Funders primarily focus on the ability of your customers to pay their invoices. They will conduct credit checks to assess the payment history and financial stability of the companies that owe you money. Businesses with customers who have strong credit profiles are more likely to secure favourable financing terms.

  Note that products can be provided with additional Bad Debt Protection to secure your company should a customer fail.

  Some services will include export debtors based abroad.

  Your Business’s Financial Health

  Some funders may also examine your company's financial health. This includes reviewing your annual sales volumes, profit margins, financial accounts and cash flow projections. They look to ensure that your business has a consistent track record of generating profits and managing its finances effectively. However, some products (such as factoring) may be entirely predicated on the strength of your customers and little attention is paid to your financial health. These services can be available when a customer has CCJs or prior credit problems.

  One key aspect of looking at your cash flow forecasts is ensuring that the funder can generate enough cash to meet your needs.

  Your Industry Sector And Nature Of Your Trade

  Certain industries might face more scrutiny due to their volatility or the irregularity of payments within the sector. Fewer funders handle sectors like construction due to the contractual nature of the debts and extended payment terms. However, there are still options. See this article for more on Who Can Use Invoice Finance.

  Factoring Criteria

  The criteria for factoring tend to major on those above around the validity of the debts and creditworthiness of your customers. Factoring criteria often don't go much beyond this enabling these products to be accessed by companies with financial problems and new companies that have no track record.

  Some providers may have size criteria (we can advise you about these on the application), but they are normally only concerned with making sure that the product is cost-effective for the user. There are services for one-off funding of single transactions.

  Invoice Discounting Criteria

  Invoice discounting criteria can be a bit more particular than those for factoring. As the products mean you will be collecting your invoices, the funder will normally want to see that you can evidence having effective credit control processes in place.

  The financial criteria for invoice discounting can be stricter than for factoring. Often providers will want to see a profitable track record and in some cases a positive net worth on the balance sheet of the company. This does vary between providers so don't exclude your company from using ID without first speaking to us about all the available options.

  Approving Your Invoice Finance Application

  This guide provides a clear understanding of the key criteria lenders consider when approving invoice finance for UK businesses, helping you prepare your application effectively to maximise the chances of success and getting approved.

  By Glenn Blackman