In the last eight weeks, two of our clients made the same discovery. Each had in place a factoring programme which had been financing 70-75% of their receivables. One to two years later, the share the factor would actually fund had fallen by 15 to 20 percentage points.
Neither client had changed factor or renegotiated anything. The advance rate had remained steady throughout and there was no single event that led to the reduction. Instead the programme’s efficiency had drifted down, one declined buyer and one late invoice at a time.
In our experience, most companies place enormous emphasis on negotiating the advance rate and interest margin. But the acceptance rate of invoices only ever gets explored at contract inception, yet it’s the evolution of this ratio which really matters.
Why the acceptance rate matters
Not every company wants to use its factoring line to the maximum. Some keep it as a backstop and draw on it only when cash is tight. For them, a lower acceptance rate may not matter much.
For most, though, factoring is one of the cheapest sources of business finance available. The lender is secured on receivables owed by creditworthy buyers, or backed by credit insurance, and the interest rate reflects this security. So if a company also has an overdraft, a revolving credit facility or term debt, it is normally most efficient to fund as much as possible through factoring and avoid the more expensive borrowing.
The simplest way to track how well the programme is performing is through factoring efficiency, measured as the total financing available from the factor as a share of the total value of invoices outstanding.
This captures everything that stands between the company’s ledger and the financing: the advance rate, but also declined buyers, insurance shortfalls, concentration caps and aged invoices.
An illustration: take a company with £10m of receivables and a 90% advance rate. If the factor accepts 85% of the ledger then the facility provides £7.65m. If acceptance falls to 65% then the facility provides £5.85m. That £1.8m gap has to be funded from somewhere, usually at a higher cost.
Why factoring efficiency declines
We commonly see four causes:
1. Credit insurance limits stop keeping up
Many programmes lean on trade credit insurance, and the factor will typically fund each buyer only up to its insured limit. Insurers can reduce or cancel limits at their discretion, usually with around 30 days' notice, and in a tightening market (as we currently face) that tends to reduce the supply of financing.
But even setting aside the question of the insurance cycle, it’s important to understand that credit limits are a scarce commodity which are allocated by the credit insurer. When the insurance contract is being re-broked (which is normally true at inception of a factoring programme) the insurer is likely to “pull the stops out” on offered limits to win the business. But there’s much less incentive for insurers to allocate limits to stable customers who have been quietly paying premiums for 18 or 24 months. Therefore, companies need to actively “manage” their credit insurers to make sure they’re not being neglected over time.
2. Overdue buyers drop out
Factors stop funding invoices once they pass an age threshold, often 90 days from invoice or 30 days from a due date. This is normal and understandable. But many go further and exclude the whole buyer. These “cross-ageing” rules take out a buyer's entire balance once certain thresholds are met (e.g. 10% or 20% of invoices are overdue). Some contracts even exclude any buyer that has been overdue at any point in the last few months.
It’s easy to see how cross-ageing clauses can transform a book where every invoice used to be eligible into one where a material portion of buyers’ invoices have become ineligible.
3. Concentration caps start to bite
Factors limit how much of the ledger any single buyer can represent, even when the buyer’s invoices are fully insured. At inception, your largest customer may have sat comfortably below the cap. As that relationship grows, everything above the cap starts becoming unfunded.
4. The business has moved on
Companies grow in directions the original contract never anticipated, and this can result in a growing share of their invoices becoming ineligible. The most common cause is export growth under a factoring contract which only covers domestic sales. Other causes may include growth in public sector clients, ineligible currencies, or ineligible contractual terms (stage payments, liquidated damages clauses etc.).
In summary, it’s not normally the case that the factoring contract has become worse; rather it’s the case that the business has changed but the contract has not.
What you can do about it
1. Manage your insurance limits actively
Companies that ask, provide information and follow up tend to get more credit limit for their key buyers. In practice that means:
- Compare each buyer's exposure with its insured limit every month, and list the shortfalls.
- Request reviews for the largest gaps, with recent buyer financials if possible and your trading history with that buyer.
- Use the top-up options offered by most insurers to increase your credit limits.
- Use your broker to challenge marginal decisions and chase pending requests.
- Be willing to rebroke if your insurer is consistently unhelpful. Risk appetite varies between insurers, and a buyer declined by one may be covered by another.
It is also worth asking your factor whether it will fund part of the uninsured or above-limit exposure. Some will - especially if your own credit position is solid.
2. Renegotiate the exclusion rules
Exclusion terms agreed at inception are often stricter than they need to be, and they are negotiable during the life of the contract, not just at signing. Points to raise:
- Can an aged invoice be excluded on its own, rather than taking the whole buyer with it?
- Can the cross-ageing threshold be raised, or the look-back period after an overdue be shortened?
- Can disputed invoices be carved out of the cross-ageing calculation?
- Can buyers that pay late by habit but reliably, such as some large corporates and public bodies, be treated differently?
- Can the concentration cap be raised for well-insured buyers?
- Can export sales or other currencies be brought into scope?
3. Tighten payment operations
Factoring programmes often introduce complexity to operational processes. Lenders typically require regular reporting on outstanding invoices, disputes and settlements. And cash application processes can become complex if settlement is into a factor’s bank account, particularly where the factor may be doing their own cash reconciliation. Weaknesses in these processes can have a damaging impact on funding efficiency.
Example, a 3 working day delay in applying cash on a book with 45 day payment terms can reduce factoring efficiency from 80% to 72% - a massive reduction. And if the delay results in some buyers hitting cross-ageing threshold, the impact multiplies
Historically, automating payment operations was expensive and complex, requiring a replatforming of the ERP, or the integration of expensive cash application software like Blackline. But with the emergence of modern agentic solutions, it has become surprisingly quick and cheap to build automation on top of legacy ERPs, avoiding the time and cost of a migration.
4. Tighten dispute management
We see a similar picture with disputes. Unresolved disputes delay settlement. But they may also make the invoice ineligible for financing while the dispute is resolved. There is no magic wand to make disputes disappear. But firms are often lax about resolving them, allowing customer emails to go unanswered for days; or failing to address the root causes which commonly lead to disputes.
Developing agreed protocols on dispute handling (for example SLAs for response times, thresholds for discretionary write-offs) supported by selective automation and tracking tools can bring down average dispute resolution times by as much as 75%, with a corresponding benefit for factoring efficiency.
5. Collect with the funding rules in mind
Most collections teams prioritise by invoice value or age. But with a factoring programme, a third question matters: how close an invoice is to the threshold that would take a whole buyer out of funding? That sounds like a complicated thing to manage but it’s not. All that’s required is a fortnightly report identifying buyers who are close to or above the cross-ageing calculation. The collections team can then be guided to put additional effort into getting those buyers debts collected.
Is it time to switch?
Changing factoring provider is time consuming, and it’s normally not what finance and AR teams want to spend their time on. However the available terms can move to a surprisingly large extent due to small improvements in a company’s financial position.
At Liquidity Lab we recently conducted a broader working capital diagnostic of a company selling to medium-sized and large retailers across France. The current factoring programme had been put in place 2 years ago, at which point the economy was still dealing with the after effects of covid and the firm was in urgent need of financing. Although the factoring contract wasn’t our primary focus, we felt that its terms seemed quite punitive so we arranged alternative quotes. Amazingly, the best of these came back offering both a financing spread over EURIBOR which was 50% lower and a 20 percentage point improvement in financing efficiency. Even more importantly, the new provider will allow them to collect their own invoices in their own bank account which will remove a whole layer of complexity from their finance operations.
In our view, benchmarking your existing programme against the market is rarely a waste of time. Even if you don’t plan to switch providers, it may give you a position of strength from which to negotiate on some of the points above.
Conclusion
A factoring programme is not something you should set up once and leave. Insurer limits, overdue rules, concentration caps and eligibility criteria all need attention. Left alone, the share of the ledger that gets funded tends to fall, and the company ends up paying more for finance than it needs to.
The starting point is simple: measure factoring efficiency every month, and the causes of the gap. Once you can see how much is lost to insurance shortfalls, overdue exclusions, concentration caps and ineligible sales, it becomes clear where to act.
Liquidity Lab is not a financing broker. But factoring efficiency is one of many levers we uncover as part of a working capital diagnostics, alongside invoicing promptness, collections performance, cash application and dispute management. If you would like to know how much your receivables could be doing for you, get in touch.