How to Read a Deed of Priority: A Complete Guide for UK SMEs Using Invoice Finance

A Deed of Priority is a legal agreement between two or more secured lenders that sets out who gets paid first if your business defaults. For SMEs using invoice finance alongside a term loan or overdraft, understanding this document can prevent costly surprises during a wind-down or refinance. This guide explains what to look for, clause by clause.

What a Deed of Priority Actually Is

When two lenders both hold security over your business, they need to agree between themselves who has the stronger claim if things go wrong. That agreement is the Deed of Priority, sometimes called an Intercreditor Agreement or a Priority Deed.

In practice, this document sits in the background throughout your facility. You may never look at it again once it is signed. But if you default, restructure, or sell the business, it becomes the most important piece of paper in the room.

For SMEs, the most common scenario is an invoice finance provider holding a fixed and floating charge over receivables, while a bank or alternative lender holds a debenture over the wider business. Both lenders need to agree whose charge takes priority. Without a signed Deed of Priority, enforcement can stall entirely, leaving your business in legal limbo at the worst possible moment.

Why Invoice Finance Providers Insist on First Ranking Over Receivables

An invoice finance facility is, at its core, a loan secured against money your customers owe you. The provider advances you a percentage of outstanding invoices, typically 80 to 90 percent, and holds your receivables ledger as security. If you cannot repay, the provider collects directly from your debtors.

For this model to work, the provider must have first-ranking security over those receivables. If a bank or other lender could step in first and sweep the debtor book, the invoice finance model collapses. This is why most invoice finance providers will simply refuse to lend unless the Deed of Priority confirms their first charge over receivables.

Your bank may be content with this arrangement because it retains first ranking over fixed assets such as property, machinery, and intellectual property. The Deed of Priority formalises this division. Problems arise when a lender refuses to subordinate or when the scope of each security interest is poorly drafted and overlaps.

The Key Clauses to Examine Line by Line

Ranking clause. This states explicitly which lender ranks first, second, or third for each category of asset. Read it carefully. Some deeds rank lenders globally rather than asset by asset, which may disadvantage your invoice finance provider.

Standstill clause. This prevents a junior lender from taking enforcement action for a defined period, often 90 to 180 days, after the senior lender has begun its own enforcement. Check the length of the standstill and whether it can be extended unilaterally.

Enforcement rights. Look for any clause that restricts your invoice finance provider from notifying your debtors without the bank's consent. This can paralyse collections at exactly the moment the provider needs to act.

Cross-default triggers. A default under one facility may automatically trigger a default under the other. Confirm whether this is mutual or one-directional, and whether there is a cure period before the trigger fires.

Amendment and consent provisions. Check whether changes to your invoice finance facility require the bank's written consent, and vice versa. This clause can slow down future negotiations or refinances considerably.

Common Negotiating Points and Red Flags

Most Deeds of Priority follow a standard structure, but the details vary by lender and solicitor. Here are the points SME owners most commonly push back on.

Scope of receivables. Some bank debentures define receivables broadly enough to include the same invoices the invoice finance provider is funding. A well-drafted deed carves out assigned receivables explicitly. If yours does not, ask for an amendment before signing.

Turnover of proceeds. If the bank collects money that should have gone to the invoice finance provider, the deed should require immediate turnover of those proceeds. Confirm this obligation is present and time-limited, ideally within two to five business days.

Notification rights. The invoice finance provider needs the right to notify debtors in an insolvency without waiting for the bank's approval. A clause requiring joint notification can create dangerous delays.

Release of security. Check what triggers each lender to release its charge. Some deeds require all facilities to be repaid before any security is released, which can complicate a partial refinance or asset sale.

What Happens in an Insolvency or Enforcement Scenario

If your business enters administration or a creditors' voluntary arrangement, the Deed of Priority becomes operational immediately. The insolvency practitioner will review it on day one to understand the secured creditor waterfall.

Under a typical deed, the invoice finance provider collects outstanding receivables and applies the proceeds to its own facility first. The bank enforces against fixed assets. Surplus proceeds from each pool flow down to the next creditor in the agreed ranking. Unsecured creditors and shareholders receive whatever remains, which is often nothing.

Where deeds are poorly drafted, disputes between secured lenders can take months to resolve and consume significant legal fees. These costs are typically charged to the insolvent estate before any distributions are made, further reducing returns for everyone.

If you are aware that your business is under financial pressure, it is worth asking your solicitor to review the Deed of Priority in advance. Understanding the waterfall before an enforcement event gives you and any restructuring adviser a clearer picture of what is recoverable and who holds the real leverage.

How to Get a Copy and What to Do With It

If you have an existing invoice finance facility alongside another secured loan, you should already have a copy of the Deed of Priority in your facility documentation. Check the closing pack from when the facilities were put in place. If you cannot locate it, request a copy from either lender in writing. Both parties to the deed are entitled to a copy.

Once you have it, the most practical step is to ask a commercial solicitor to produce a short summary covering: ranking, standstill length, enforcement restrictions, cross-default triggers, and amendment requirements. This summary, sometimes called a facilities matrix, becomes useful whenever you refinance, add a new lender, or face a credit review.

If you are in the process of setting up a new invoice finance facility alongside an existing bank relationship, ask your invoice finance provider which law firm they prefer to use for the deed. Using a firm experienced in intercreditor work reduces the risk of poorly drafted clauses and speeds up execution. Legal costs for a standard Deed of Priority typically range from £1,500 to £4,000 depending on complexity.

Switching Invoice Finance Provider When a Deed of Priority Is in Place

Changing your invoice finance provider does not automatically cancel the existing Deed of Priority. The old deed will need to be formally released and a new deed executed between your bank and your incoming provider before the new facility can go live.

This process typically takes two to four weeks if both lenders cooperate. Delays most often occur when the bank requires its own solicitors to review the new deed rather than accepting the incoming provider's standard form. Budget for this time in your switching timeline and notify your bank early.

Your outgoing provider will need to confirm that its security has been discharged and that it has released its charge at Companies House. Check the Companies House register yourself after completion to confirm the charge has been removed. A charge that remains registered can complicate future lending even if the facility has been repaid in full.

If you are switching while your turnover is growing rapidly, confirm with the incoming provider that the new deed covers the increased facility limit you expect to need within the next twelve months. Renegotiating the deed again six months later adds unnecessary cost and disruption.

Checklist

• ☐Locate your existing Deed of Priority from your facility closing pack or request it in writing from either lender.
• ☐Check the ranking clause confirms your invoice finance provider has first charge over receivables specifically, not just a general first charge.
• ☐Review the standstill period and confirm it is no longer than 180 days and does not require your consent to extend.
• ☐Verify that enforcement and debtor notification rights are not conditional on the bank's prior written approval.
• ☐Check Companies House to confirm the correct charges are registered and that any discharged charges have been removed.
• ☐Ask a commercial solicitor to produce a facilities matrix summarising all key intercreditor terms before you sign or refinance.

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