Decoding your invoice finance facility agreement
Here’s your guide to interpreting some of the key points in your invoice finance facility agreement.
Facility limit
This is the maximum amount that your lender will loan you at any one time and includes accrued fees and interest at any one time. The aim of your invoice finance funder is to help your business to grow, and if business grows to such a point that you need a higher limit, then you can usually apply for this. You may need to provide a fresh set of management accounts (profit and loss and balance sheet), recent bank statements, and any other documents to support your application for an increase. For example, you might provide copies of contracts or credit agreements signed by you and a new customer.
Exposure
This is the total amount of money you have borrowed at any one time. If you were to close your facility, usually the exposure figure is what you would pay back (unless fees are added at the time of closing your facility).
Administration fee
The administration fee is charged on all invoices presented for funding and is a percentage of the GST-inclusive value of the invoices. The fee is charged directly to your current account (the amount borrowed from) when the invoice is loaded and is deducted from available cash.
For example if you submit an invoice for $10,000 and your fee is 3%, and your financier funds 80% of the value of an invoice, your available cash will be 80% x 10,000 less $300 = $7,700.
Recourse period
The recourse period is the number of days from the due date of an invoice that the invoice will become disapproved for funding (ie that funding will no longer be provided for that particular invoice). Usually the recourse period is 30 days. In limited cases, your funder may offer 60 days.
For example; An invoice is created on 1 March and is due 20 April. It has 30 day recourse. The invoice will be considered overdue if it is not paid by 30 April but your funder will continue to fund against that invoice until 31 May. From 1 June, the invoice will become disapproved. The effect of this is that it will reduce the amount of money you can be paid.
Default customer/debtor limit
Your funder will automatically approve funding against individual customers up to a certain value, called the default limit. When invoices are presented that take the customer above this amount, your funder may perform credit checks and other reviews of the customer. Their limit will be increased incrementally as needed, up to the maximum debtor limit.
Maximum customer/debtor limit
This is the maximum value of invoices that your funder will loan you against a single debtor. If invoices to one of your debtors are expected to exceed this amount, let your finance company know in advance so they can consider increasing the limit for that customer.
Default customer/debtor concentration limit
Your funder will automatically approve funding for customers to a certain percentage of your submitted invoices. When invoices are presented that take the customer above this percentage, they may perform credit checks and other reviews of the customer. Their concentration limit will be increased incrementally as needed, up to the maximum debtor concentration limit.
Maximum customer/debtor concentration limit
The is the maximum percentage of your ledger that your funder will fund any single debtor to. For example, if the maximum debtor concentration is 40% and the entire debtors ledger is $1000, a single debtor will not be funded to more than $400.
Termination notice period
Often you need to give notice to end your facility. Check your facility document carefully. Often if you don’t give the required amount of notice, fees may be charged on termination.
Assignment notice
Your funder will require you to update your invoice template, to include a notice that the invoice has been assigned to them, and the bank account number that your customers are to pay into.
If you have an undisclosed facility, your customers will be advised of a change in bank account only. The only update to your template would be along the lines of “please note our new bank account details”.
Assignment letters (disclosed facilities only)
There are two types of assignment letters.
The first is a letter from you to your customers, advising them that you are using an invoice finance facility, and instructing your customers to pay into a bank account set up for you by your invoice finance funder.
The second is a similar letter from your funder to the customer. In some cases, your funder will require your customer to countersign and return an assignment letter, to acknowledge that they will pay into the funders bank account.
Invoice verification
As a precaution against fraud, and to make sure that an invoice presented for funding will actually be paid, your funder may verify some or all invoices with your customer. How this will be done will be discussed with you before your facility becomes operational. Sometimes it will involve a call to your customer, other times it might only require supporting documentation from yourself. Occasionally it might require both.
Invoice verification does not take place when you have a confidential facility.