What Factors Can Affect Your Invoice Finance Funding?
For recruitment agencies placing contract or temporary staff, maintaining a steady cash flow is essential. Candidates often need to be paid before clients settle their invoices, so having the right invoice finance funding arrangement in place ensures there are no gaps in funding.
When set up properly, invoice finance should provide the necessary prepayment to cover candidate wages until the client pays. However, invoice finance funding providers include specific terms and conditions that can impact whether invoices are fully funded. Understanding these factors can help you avoid disruptions to your cash flow.
Here are some of the key considerations:
Client Credit Limits
For agencies working with private sector clients, invoice finance funding typically requires each client to have an adequate credit insurance limit. This protects against potential losses if a client becomes insolvent.
The limit is based on the client’s creditworthiness and is usually applied for by the agency. If the total outstanding invoices for a client exceed this limit, invoice finance funding may be restricted until the balance is reduced or the limit is successfully increased.
Client Funding Limits
In some cases, providers may offer a funding limit that exceeds the insured credit limit. This allows agencies to access additional funds, but it also increases risk, as amounts above the credit limit may not be protected.
Like credit limits, invoice finance funding limits are capped. If outstanding invoices exceed this threshold, the provider may pause or restrict further funding.
Facility Funding Limit
When setting up an agreement, the provider will establish an overall funding limit based on projected turnover for the next 12 months.
If this limit is reached, the provider will review the facility. Growth-driven increases, such as a rise in placements, may justify an extension. However, if the limit is reached due to slow payments or deteriorating debt quality, increasing it may be more difficult. In either case, funding could be restricted until the review is complete.
Invoice Finance Funding Can Impose Client Concentration Limits
Finance providers prefer agencies to have a diversified client base. Relying too heavily on a single client increases risk if that client stops trading or delays payments.
To manage this, providers may set a concentration cap, limiting how many clients a single agency can represent within the overall debtor book. If this percentage is exceeded, the invoice finance funding provider reduce funding until the exposure is lowered.
Export Concentration Limits
Similarly, providers may monitor the proportion of overseas debt. A high level of international invoicing can increase risk due to factors like jurisdiction and payment practices.
To mitigate this, an export concentration limit may be applied. If overseas debt exceeds the agreed percentage, funding could be restricted.
How Do Invoice Finance Funding Providers Handle Overdue Debts?
Typically, finance providers will fund invoices for a set period, often between 90 and 120 days. If an invoice remains unpaid beyond this timeframe, it may be withdrawn from funding and reassigned to the agency.
At that point, the agency becomes responsible for repaying any funds advanced against that invoice. The only way to recover the full value is for the agency to eventually settle the debt.
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