Invoice Finance

A business selling on credit terms carries its customers permanently: at any moment, weeks of completed work sits on the ledger as unpaid invoices, and the faster sales grow, the more cash the ledger swallows. When the debtors are many and the invoices continuous, no single-transaction product fits — a trade loan wants one identifiable trade, and a fixed limit ignores that the need scales with sales. Invoice finance funds the ledger itself: an advance rate against eligible receivables, availability that rises as invoices are raised and repays as they collect.

The product's essence is that the collateral is a population, not a thing. Hundreds of small debts, constantly born and constantly dying, owed by parties the financier never chose. Everything distinctive about the product — the eligibility rules, the concentration caps, the audits, the reserves — is machinery for lending against a crowd, and the desk's reading runs less on the client's profit line than on the quality and honesty of the ledger.

The advance rate — commonly around 70-90% of eligible receivables, with the margin held back as the cushion against disputes, credit notes, and shortfalls. Eligibility rules — the quiet heart of the product: age cutoffs, related-party exclusions, dispute and set-off carve-outs, and a per-debtor concentration cap, so that the funded pool remains a genuine spread of arm's-length debts. The availability calculation — eligible pool times advance rate minus funds in use, recomputed continuously from the ledger data the client uploads.

Then the structural fork: factoring, where debtors are notified and pay the financier, who runs collections; or confidential invoice discounting, where the client keeps collecting in its own name and the financier's control is replaced by audits and verification. Around both: recourse (unpaid invoices recycle back to the client after a set period, unless credit insurance is wrapped in), a trust or collection account for receipts, and fees in two parts — a service fee on turnover and interest on funds in use.

Two modest-looking components that must be added and re-expressed before comparing with anything else. A constructed illustration, every figure invented for teaching:

Neither headline number says fifteen percent, and the honest comparison starts from it. That effective cost is not automatically a verdict against the product — the funding genuinely scales with sales, needs no fixed asset security, and can be the only structure that fits a fast-growing book — but it is the number to weigh against a revolving facility where one is available, and against the margin the business actually earns on the sales being financed. Funding growth is only worth it when the growth is worth funding.

The ledger is the borrower. The desk underwrites the receivables population: how it ages, who it concentrates in, and — the number non-specialists miss — dilution: the percentage of invoiced value that never converts to cash because of credit notes, rebates, disputes, and adjustments. Dilution history sets the honest advance rate; a book that quietly dilutes at eight percent cannot safely support a ninety percent advance, whatever the aging looks like.

Concentration is the shape-shifter. A ledger where one debtor is half the book is not really invoice finance — it is single-name exposure wearing a spread product's clothes, and it should be read the way Issue 05 reads customer concentration: the risk is the asymmetry of commitment, not the paperwork. The caps exist to force that conversation early. Verification is the fraud control. The oldest failure in this product is fresh-air invoicing — funding raised against invoices for work not done or debts that do not exist — and the defences are unglamorous: debtor confirmations, cash-matching, audits, and attention when invoice patterns change shape.

And the availability spiral. The product's structural echo of the revolver's adverse selection: when a client weakens, their debtors slow, aging worsens, more of the book falls out of eligibility — and availability contracts exactly when the client needs it most. It is nobody's bad faith; it is the mechanism. A desk sizing a facility, and a CFO relying on one, should both know where the availability goes in a bad quarter before the bad quarter demonstrates it.

Dilution discovered late. The advance rate was set off gross aging, the credit notes ran at eight percent, and the cushion everyone relied on was never really there. The dilution study belongs at the start, not in the workout.

The concentration surprise. The client wins a huge customer, the ledger doubles, and availability barely moves — the new name blew through the per-debtor cap. The cap was doing its job; the surprise means nobody explained the product's geometry when the facility was sold.

Confidential trust without the discipline. Invoice discounting granted on relationship optimism to a business whose ledger administration cannot carry it — collections drift, receipts stray from the trust account, and the financier is the last to know. The disclosed product exists precisely for books that are not ready.

The masked deterioration. Because funding scales with invoicing, a business can keep drawing cash while its debtors quietly stop paying — growth in the facility masking decay in the book, until eligibility rules catch up all at once. The early tell is on the debtor-days line, read against the ledger rather than the ledger's funding.

The boundary with single-transaction lending is drawn on the trade loan file — identifiable single trades there, the continuous ledger here — and stacking one product to do the other's job is a failure mode both pages name. Issue 05 works the concentration judgment this product's caps exist to force. Debtor days and their drift — the vital sign under every ledger — are worked in the cash conversion cycle example, and the borrower's-side reading in How Banks Read You.