7 things worth knowing about invoice financing rules

Invoice financing has four parties in it, and only two of them signed the agreement. You and the financier signed. Your customer did not, and neither did any other creditor who already has a claim on what you own. The rules that govern the product are mostly rules about the relationships between those four, and different bodies keep each set.

This page names the invoice financing rules that govern those relationships and the body that keeps each one — the UCC sections, the state statutes, the regulators and the federal rules — so you can look them up. The thresholds and deadlines inside those rules change, and the named text is where to read the current ones.

The seven rules, named

You and your customer

This relationship is governed by contract, and the contract is one you already have. Two things in it matter.

The first is whether your terms of business permit the receivable to be assigned to a third party. Some customer contracts prohibit it outright, some require consent, most say nothing. The body that governs this is the agreement itself, read under the contract law of whichever jurisdiction it names.

The law's answer is in UCC § 9-406, as your state has enacted it: for accounts — which is what an unpaid invoice is — a term that prohibits assignment or requires the customer's consent is generally ineffective against the financier. It may still be a breach of contract the customer can complain about, and other law can restrict assignment of particular kinds of receivables, so check your state's text.

The second is what your contract says about disputes, acceptance and payment terms. Those define when a debt exists and when it is due, and therefore what is financeable at all.

Read your major contracts for both before applying. It is the only part of the rulebook you can check in an afternoon without leaving your desk.

You and the financier

Characterization. Is the arrangement a purchase of your invoices, or a loan secured on them? The document will say one or the other. Courts decide which it really is, and the answer matters for what happens if either of you becomes insolvent, for what interest-rate law applies, and for how the arrangement is treated by the IRS and by the accounting standard-setter, the Financial Accounting Standards Board, whose ASC 860, Transfers and Servicing, is the rule that separates a sale of receivables from a loan against them. This is a question for a lawyer if the amount is material.

Filing and priority. In the United States, a financier protects its claim on your receivables by filing a UCC-1 financing statement under Article 9 of the Uniform Commercial Code as your state has enacted it. In most states that filing goes to the Secretary of State's office, which also runs the search you use to see what is already on record. Priority between competing filings goes to the first to file or perfect, the rule in UCC § 9-322.

Licensing. Whether a commercial financier must hold a license, and from whom, is set by each state. The California Department of Financial Protection and Innovation (DFPI), the New York State Department of Financial Services (NYDFS), the Utah Department of Financial Institutions and the Virginia Bureau of Financial Institutions all publish the registers and licensee lists for their states, and each regulator's site will say whether a licensing regime exists and whether the provider is on it.

Disclosure. Several states have enacted commercial financing disclosure statutes, and some of them reach receivables financing: California's Commercial Financing Disclosure Law (SB 1235), which the DFPI administers; New York's Commercial Finance Disclosure Law, administered by NYDFS; Utah's Commercial Financing Registration and Disclosure Act; and Virginia's commercial financing disclosure statute, administered by the Bureau of Financial Institutions of the State Corporation Commission. Each prescribes what an offer must state and the size of transaction it reaches, and most states have nothing at all. Which state's law reaches your agreement depends on where you are, where the financier is, and the governing-law clause.

Conduct. Section 5 of the FTC Act makes unfair or deceptive acts or practices unlawful, and the FTC is the federal body that enforces it; the FTC's own credit and finance guidance for businesses is where its material on this sits. Your state attorney general enforces a parallel state statute. Separately, when a business credit application is denied or handled differently, the Equal Credit Opportunity Act and Regulation B (12 C.F.R. part 1002) require the applicant to be told.

The financier and your customer

Once a notification of assignment is given, your customer may be obliged to pay the financier rather than you, and paying you instead may not discharge the debt. The rule is in UCC § 9-406: a notification is effective only if it reasonably identifies the rights assigned, and a customer who asks for reasonable proof of the assignment may keep paying you until that proof arrives.

How the financier behaves when collecting is a separate question that turns on the debtor. The Fair Debt Collection Practices Act and the consumer collection rules generally do not govern collection from a business, and commercial collection conduct sits mostly under state law and general unfair-practice law.

If any of your customers are individuals rather than businesses, tell the financier. Ask which regime it applies, because that changes both the law and the price.

The financier and everyone else with a claim on you

If another lender already holds a filing over your business assets, your receivables may sit inside it. Article 9's priority rules decide which claim ranks first, and if the business ends up in bankruptcy court, the U.S. Bankruptcy Code and the court decide what happens to the receivables and to the financier's claim on them.

So financiers search the filing office before advancing. An existing blanket lien must be cleared, by release or by lender agreement, before a facility can start.

The map in one table

How to find the current position

Where to go for the rest

The mechanics of the product, from the evidence chain to concentration and recourse, are in invoice financing. What the documents will do in a difficult quarter is described in application and repayment. For neutral background on financing generally, the FDIC's Money Smart for Small Business is a reasonable start.

Common questions

Is there a national regulator for invoice financing?

Not in the sense of one body that licenses and supervises it. Federal bodies touch selling conduct and bank supervision — the FTC on how the product is sold, and the federal banking agencies where a bank is involved. The core rules are state law and the contract.

My customer's contract says I cannot assign the invoice. Is that the end of it?

Not automatically. UCC § 9-406 generally makes a term that forbids or restricts assignment of an account ineffective, so the clause usually will not stop the financing. It may still be a breach your customer can complain about, and your state's enacted version is what settles it; renegotiating the clause is often simpler than litigating its effect.

Does it matter whether the agreement is called a purchase or a loan?

Yes, and not because of the label. The characterization affects insolvency, interest-rate law and tax and accounting treatment — for accounting it is ASC 860 that decides whether the receivables left your balance sheet. Courts look at the substance.

Do disclosure statutes apply to my facility?

It depends on your state and on the size and form of the facility. California, New York, Utah and Virginia have commercial financing disclosure statutes with published thresholds, run by the DFPI, NYDFS, the Utah Department of Financial Institutions and Virginia's Bureau of Financial Institutions; most other states have none. Start with the governing-law state's regulator rather than a summary.