• 27 May

    Help With Invoice Finance Funding Restrictions

    Invoice finance funding restriction explained, with help to overcome them.Funding restrictions can be a problem for some businesses using invoice finance. There are several ways that restrictions can arise, and there are many possible solutions. Not all funders will apply the same restrictions.

    For help with funding problems please call Sean on 03330 113622.

    How Funding Restrictions Arise

    Funders constantly review their client's accounts, and they can apply funding restrictions at any time. The objective of this is usually to better manage their risk. However, the consequence is that customers can find their funding levels diminish without warning. Factoring agreements normally give the funder the right to withdraw, or restrict funding, without notice.

    Methods Of Restricting Funding

    Restrictions can be applied in several ways:

    • Reserves held against availability - this is a financial value withheld from the available funding.

    • Adjustment of prepayments - the prepayment percentage e.g. 85% could be reduced by one or more percentage points.

    • Tightening the prime debtor percentage/concentration - if the larger debtors are the issue, any prime debtor restriction can be tightened to reduce funding against one, or more, accounts (depending on how their restriction works). There can be restrictions against RPO debtors.

    • Disapproving, unapproving or excluding certain debtor accounts. This removes funding against those accounts. It can also be applied at an invoice level i.e. disapproving certain types of invoices. This could include say invoices that had not been able to be verified (confirmed with the debtor).

    • Removing or reducing a debtor credit limit/funding limit - this reduces the maximum value of invoices on a certain debtor, that can be funded.

    • Reducing the facility limit/payment ceiling - this is an overall cap on the total amount of funding that can be available. It can be reduced to limit funding.

    • Freezing your account - the ultimate sanction is of course freezing or suspending your account so that you can't access any further funds.

    Events That Can Trigger Restrictions

    The events that can lead to restrictions include the following:

    • Conducting reviews of customer's accounts. This could be sales ledger-related information, financial performance information or other creditor deteriorations e.g. pressure from HMRC.

    • Reviewing debtor's accounts, either their payment performance or financial information and credit reports.

    • Feedback from credit control staff about problems on the sales ledger.

    • Feedback from auditors (for invoice discounting) following a quarterly audit visit.

    • Automated restrictions applied, in some cases driven by risk management software.

    Issues That Cause Problems

    Some of the issues that could give rise to restriction can include:

    • Sales ledger ageing deteriorating i.e. debts getting older without being paid.

    • Deteriorating financial performance in management or annual financial accounts.

    • Worsening of creditor position.

    • Identification of sales ledger dilutions e.g. credit notes, contra accounts, disputes or other factors that may reduce the collectable value.

    • Identifying evidence that debts may not be valid i.e. fraudulent invoices.

    • Changes to the management structure of the client's business.

    Solutions

    The obvious solution is to talk to your funder, identify what the issue is, and see what you need to do to have them remove the restriction. For example, bring the debtor ageing up to date, or resolve disputes with customers etc.

    If you are unable to resolve the issue with your existing funder, there may be an alternative provider that will take a different view and be more flexible with your funding formula.

    Other Resources

    Case Study - Help with funding restrictions against RPO debtors.

    Research - Comparing invoice discounting funding percentages. 

    By Glenn Blackman

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Examples of funders we work with:

muse
kriya
seneca
pulse cashflow finance
skipton
leumi abl