Invoice Financing Requirements: What to Prepare

Invoice financing requirements focus first on your sales ledger and the customers on it, not just on you as the applicant. A financier is buying, or lending against, debts other people owe you, so most of the questions are about those people and about the paper that proves the debt exists.

That changes what you prepare. Your accounts still matter, but they are examined third, not first.

What follows covers the three areas a financier may examine: the debtor, the debt, and the process that produced it. These are preparation points, not universal approval rules. Eligibility thresholds, minimum invoice sizes, advance rates, concentration limits, fees, and funding timelines vary by financier and facility; ask for the terms that would apply to you.

What to take away

The debtor: your customers

A financier's exposure is to your customers, so it wants to understand them. It asks who they are, business or consumer, and how long you have traded with them. Record whether each customer is a business or consumer, and ask whether the financier accepts consumer receivables before counting them toward the facility.

Expect questions on how they pay against the terms you set, and how much of your ledger sits with the largest one or two.

Prepare, from your own records:

That last item is where many applications narrow. Financiers cap exposure to any single debtor, and a business whose revenue rests on one or two accounts may find part of that ledger cannot be financed. Better to know before you build a plan on the facility. For a broader explanation, see invoice financing.

The debt: the invoices

An invoice is generally more likely to qualify when it is for work that is complete, delivered, accepted, and not in dispute, and when you can prove each of those things. The proof is a chain, and the financier will want to see that you can produce it for any invoice on demand.

Build the chain from the customer's purchase order, contract or work order to your invoice. Then include performance evidence, such as a signed delivery receipt, bill of lading, completed timesheet or service report, and acceptance evidence, such as a signed acceptance, customer email or portal acknowledgment. Remittance advice or account statements can help reconcile payments, credits and the remaining balance. The records vary by transaction; they should connect the order, completed work, acceptance and amount due.

Have three or four complete chains ready for typical invoices. If your business bills in stages, or against milestones, or with retentions held back until a later date, say so early, because partial or conditional invoices are treated differently and some structures will not finance them at all.

The process: you

The financier is also underwriting whether your business can run the arrangement without creating problems for them. This is where your own books come in.

Questions commonly concern whether your books track each invoice through payment, credit, dispute or write-off. Be ready to show an aged receivables ledger reconciled to your accounting records, explain unapplied cash and disputed balances, and describe who checks customer credit, follows up on late payments and reports collections. If you will collect the invoices yourself, explain how and when you will remit funds and report activity to the financier.

If you want to keep your own ledger and collect payments yourself, expect the financier to examine this part more closely under a discounting arrangement than under factoring, because you are asking to be trusted with the collection.

Four things that stop an application before it starts

Anti-assignment clauses. Some customer contracts prohibit assigning the receivable to a third party. Read your major contracts for this before applying. UCC Article 9, § 9-406(d), can make certain restrictions on assignment of accounts ineffective, subject to exceptions and the state's enacted version. The assignment of accounts rule does not resolve every contract or transaction, so which rule applies is a lawyer's question. A financier will form its own view before you get one, so a customer whose contract says this may simply be unfinanceable to that financier, whatever the law would eventually decide.

An existing blanket lien. A blanket lien usually begins with a security agreement granting a lender an interest in business assets, including receivables. Under UCC Article 9, a UCC-1 financing statement filed with the relevant state UCC filing office, often the Secretary of State, gives public notice and generally perfects an attached security interest; the filing alone does not create the lien. Search that office's UCC records under your business's exact legal name. If an existing agreement covers receivables, the new financier may need a release or an agreement on priority, so start that conversation with the existing lender before you apply. The relevant concept is perfection: the steps by which a claim on property becomes good against everyone else. Filing timing can affect priority, subject to the applicable rules. Whichever facility introduced that earlier filing, most often a line of credit, is the one to call.

Related-party invoices. Invoices to a company you own, or that your family owns, are generally not treated as third-party debts. Separate them in your records.

Billing ahead of delivery. Invoices raised before the work is done are not evidence of a debt. If your practice includes deposits or advance billing, expect those invoices to be excluded and plan around it.

The eligibility rules lenders write into the agreement

Bank lenders that finance receivables publish their rules to supervisors, and the OCC's Comptroller's Handbook on accounts receivable and inventory financing sets out the usual ones. Agreements usually specify that certain receivables are ineligible because of their type or how overdue they are. The normal practice is to treat an account as ineligible once it is older than three times its payment terms.

The types usually excluded are:

Most agreements also apply cross-aging: when some of one customer's invoices become ineligible, all of that customer's accounts can be designated ineligible. Lenders also require an aging of receivables listing each customer's name, balance outstanding and current payment status, and field auditors obtain written account verifications from your customers. Ask each financier whether its facility is notified, meaning your customers are told to pay the financier, or confidential.

What may be asked of the owners

Ask directly what personal commitment is expected. Some arrangements want a guarantee that covers the validity of your invoices, not your customers' ability to pay. Others ask for more.

Read exactly what any guarantee covers and what triggers it. The two forms differ: promising you will not submit false invoices versus promising to pay your customers' debts yourself.

Assembling the file

Assembling this is also the moment to find out what the facility will actually cost relative to what it advances, and which charges sit outside the headline rate. For questions on costs and repayment terms, see application and repayment.

Where to check anything specific

Each financier's actual requirements are its own and can change. Ask for current eligibility rules and terms before you apply. For the vocabulary of the product and a neutral overview, the FDIC's Money Smart for Small Business is a fair starting point. For how a weaker file can change the conversation across products, see loans by credit profile.

Common questions

Does my own credit matter if the invoices are strong?

Less than in other products, but it is not irrelevant. The financier still needs the business behind the ledger to survive long enough to deliver the work and handle disputes.

My biggest customer is most of my revenue. Is that a problem?

It is a limit rather than a refusal. Ask each financier what share of the ledger it will accept from a single debtor, and plan the facility around the answer.

What if I cannot produce a signed delivery note?

Find another form of acceptance: an email confirming receipt, a timesheet countersigned, a portal acknowledgment. The point is evidence the customer accepted the work. The form matters less than its existence.

Should I fix my bookkeeping before applying?

Yes, and not for the financier's sake. A ledger you cannot reconcile is a ledger you cannot run a facility on, and the fees accrue while you sort it out.