Dilution

In invoice finance, dilution refers to any reduction in the face value of an invoice after it has been submitted to the finance provider for funding. Common causes of dilution include credit notes issued to customers, goods returned or rejected, early payment discounts taken by customers, disputes over the quality or delivery of goods or services, and contra arrangements where the debtor also supplies goods to the seller.

Lenders monitor dilution closely because it directly affects the value of the collateral securing the facility. High dilution means a significant proportion of invoices are not collected at full face value, which increases the lender's credit risk. Most invoice finance agreements include a dilution clause that allows the lender to adjust advance rates or reduce the eligible ledger if dilution exceeds an agreed threshold.

Businesses with recurring dilution above 5-10% of turnover may face lower advance rates or tighter facility terms. Reducing dilution by improving order accuracy, delivery quality, and dispute resolution processes benefits both the business and its relationship with its finance provider.

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