- 25 Feb
What Are Credit Limits In Invoice Finance And Factoring
Credit limits are often mentioned in the context of invoice finance and factoring. Below I will explain exactly what they are and how they work.
What Are Invoice Finance & Factoring Credit Limits
Credit limits are set by invoice finance companies to control their exposure to each of your debtors, when you are using a receivables financing facility. Their exact function depends upon the type of facility that you are using. They are normally expressed as a value in GBP in the UK e.g. £10,000, or they may be set in currency for foreign debtors e.g. USD10,000.
Non Recourse Credit Limits
If you are using a non recourse facility (which includes bad debt protection) the credit limit is the maximum value of invoicing to the debtor, that will be covered by the bad debt protection. Normally, the invoices also need to fall within that credit limit in order to attract funding. If your credit limit was £5,000 and you invoiced £5,500 to that customer the £500 that exceeds the credit limit would not be covered by the bad debt protection and it would also not attract funding.
In some cases a funder will fund against "approvables" also called eligible debts. This means that they will fund against debts that fall both inside and outside of the credit limit. However, those invoices that fall outside the limit are not covered by the bad debt protection.
With some invoice discounting facilities individual debtor limits are not written, although in some cases they are. All eligible debts are funded in these cases i.e. all invoices that have not been disapproved or excluded from the arrangement (other restrictions such as prime debtor controls may still apply).
Recourse Credit Limits
If you don't have the bad debt protection element, you are using what we call a recourse facility. Credit limits may still be used to control the maximum amount of invoicing that is funded for particular debtors. Often these will be called funding limits, which is perhaps a more accurate description. However, many finance companies still refer to them as credit limits. Some funders may not use debtor limits at all, they may just fund against all your debts that are not disapproved for funding (this could be for a variety of reasons).
Solving Credit Limit Problems And Restrictions
We regularly assist customers that are having credit limit problems. Sometimes an invoice finance or factoring company will be unable to write the required credit limits to generate the amount of funding that is required. It does not necessarily follow that other funders will not be able to provide larger limits, in fact we have had a lot of success finding larger credit limits for our customers.