Invoice discounting funding problems caused by unapproved debts and concentration limits

Invoice discounting companies frequently operate on a recourse basis meaning that all debts are at their client’s risk in the event of customer failure yet despite not taking any risk themselves they can be very restrictive on whom they allow their client to sell to.

Unfortunately many invoice discounting providers impose arbitrary credit limits on their clients' customers with the sole aim of restricting the funding as they will refuse to fund balances in excess of the imposed credit limit.

We have been contacted in the past by companies unhappy with their existing discounting arrangements telling us that despite the fact that their company was turning over in excess of £1.5m their discounter had imposed a blanket credit limit of only £5,000 per customer. (case history here)

Others in a similar situation have mentioned that despite a discounting agreement that was supposed to provide them with 80% of invoice values up front, their funding was being restricted as the major customer accounted for 30% of the total and the provider refused to fund any balance in excess of 20% of the total.

In the case of non recourse facilities where the discounter assumes the credit risk in the event of failure of the client’s customer we have seen many instances where funding can be, and sometimes is restricted by the setting of credit limits at an unrealistically low level which not only reduces the discounting company's exposure in the event of a customer failure but also allows them to reduce the overall funding level.

The Association of Factors and Invoice Discounters periodically publish a breakdown of various statistics for most of their members, some of which can make for worrying reading as there are a large proportion of members who report that the average investment in their clients’ debts averaged over all of their clients is under 50%

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