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How Finance Lenders Calculate Prepayment Levels

If you have been looking for an invoice discounting or invoice factoring facility you will almost certainly have seen lenders advertising prepayment levels "up to 90%". However, in reality the prepayment level offered is often lower than this. Let’s take a look at how invoice finance companies work out the prepayment levels. That way you can see what your business has to do in order to obtain a higher prepayment level.

Invoice factoring companies and invoice discounting companies have to take a view of your book debts in terms of the security that they offer to them if your business was to fail. They will take into account what they feel may happen in a failed situation with regard to how much of your book debts they will be able to collect from your customers.

For example if on a monthly basis you have returns that equate to 5% of sales because of product failure or mis-delivery then they will expect to see this if they are in a collect out situation in the event of business failure.

If you offer retrospective discounts of 2.5% for early settlement then the lender must account for this by reducing the prepayment level.

These discounts and credit notes are termed dilution by invoice finance lenders. If a lender states they lend up to 90% but your average monthly dilution is 10% then the likelihood is they will offer you an 80% prepayment. Similarly if the dilution is 20% they will reduce the prepayment to 70%

What else can reduce prepayment?

Areas where you may see vastly reduced prepayments are if you operate in the permanent recruitment sector or the construction sector.

In permanent recruitment lenders often approach with caution because it is the norm for rebates to be offered should a candidate leave within a certain timeframe. This can severely impact on what a lender may be able to collect out in a failed situation. On that basis prepayment levels within the permanent recruitment sector can range between 50-70%. Historically lenders would not finance perm placements at all but gradually as a deeper understanding developed prepayments of 50% were available against permanent placement. With increased understanding and the forces of competition the prepayment levels have been forced up to 70%.

Within the construction sector customers can make various deductions from invoices including the deduction of tax at source and retentions. There is also the risk that liquidated damages can be applied against money owed in a failed situation. On that basis prepayment levels can be dramatically reduced and can often be between 20-60%. If you are a construction contractor the likelihood is that you may need to use a specialised construction factoring company to finance your business.

How can prepayments be increased?

As we have shown the higher the dilution levels the lower the level of prepayment. So by reducing your levels of dilution you can increase prepayment. This can be done by improving administration, improving quality control and implementing a better audit trail to include a sign off of satisfaction prior to invoicing. You can also remove any retrospective discounts to ensure what is actually invoiced is what is paid.


If you have concerns about prepayment please call our dedicated team on 0845 863 0738 or email us.

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