Is invoice finance a true sale or a secured loan under IFRS 9?
It depends on who carries the risk that your customers pay late or do not pay at all. Under IFRS 9 (the international accounting standard for financial instruments) you can only take the invoices off your balance sheet if you pass substantially all of that risk to the lender. If you keep it, for example because you must repay the lender when a customer does not pay (this is called recourse), the invoices stay on your balance sheet and the money from the lender is shown as a loan secured on them. The UK standard FRS 102 uses the same test.
This page is about the accounting test. For how to record the facility in your books, see invoice finance and accounting. For a simple before-and-after example, see how invoice finance affects your balance sheet.
The three outcomes in IFRS 9
Paragraph 3.2.6 of IFRS 9 asks how much of the risks and rewards of owning the invoices you keep after you hand them to the lender. There are three possible answers:
| What you keep | What happens in your accounts |
|---|---|
| Almost none of the risk: the lender has taken substantially all of it | The invoices come off your balance sheet (derecognition). Any rights or duties you keep are shown separately. |
| Substantially all of the risk | The invoices stay on your balance sheet in full. The cash from the lender is shown as a liability (paragraph 3.2.15). |
| Some of the risk, but not substantially all | A second test: who controls the invoices? If you have given up control, they come off. If you still control them, you keep them on to the extent you are still exposed (called continuing involvement, paragraph 3.2.16). |
Source: IFRS 9 chapter 3, as published by the Australian standard setter in AASB 9 (Australia's adoption of IFRS 9), read 11 October 2026.
What "risk" means here
The test compares how much the cash you get from the invoices can change, in amount and in timing, before and after the deal. KPMG says the seller must look at the risk of non-payment, the risk of late payment and, where relevant, currency risk. If you still lose out when a customer pays slowly, you have kept part of the risk, even if the lender covers bad debts.
FRS 102, the main UK accounting standard, gives two worked examples in section 11 (text here). In the first, a company sells receivables (unpaid invoices) to a bank and has no duty to the bank for slow payment or non-payment. That counts as a sale. In the second, the company must buy back any invoice more than 120 days overdue. It has kept the risk of slow payment and non-payment, so it keeps the invoices on its balance sheet and treats the bank's money as "a loan secured by the receivables". HMRC's own corporate finance manual sets out the same three FRS 102 conditions.
How to tell which one you have
Read your facility agreement with these questions. Each "yes" points towards a secured loan rather than a sale.
- Recourse. Must you repay the lender, or take the invoice back, if a customer does not pay?
- Overdue buy-back. Must you buy back invoices after a set number of days overdue, like the 120-day example above?
- Late payment cost. Do you pay more in charges the longer a customer takes to pay? Then you carry the timing risk.
- Limited cover. Does the lender or an insurer only cover bad debts above a first loss, or up to a cap, with the rest falling on you?
- Retention. Is the part the lender holds back (the gap between the invoice and the advance) used to cover the lender's losses before it comes back to you?
Non-recourse factoring, where the lender takes the bad debt risk, can lead to derecognition, but only if you are not left with most of the risk in other ways. Our guide to recourse vs non-recourse invoice finance explains the commercial difference. The answer turns on the exact wording of your contract, so your accountant or auditor makes the final call.
Why it matters
If the invoices stay on, both your assets and your liabilities go up by the amount drawn, and the facility shows as borrowing. If they come off, your trade debtors go down and you get cash instead, with no loan. That changes ratios that banks and buyers look at, such as gearing (borrowing compared with your own money in the business). See does invoice finance count as debt for what this means for loan agreements.
Common questions
Does the word "sale" in my factoring contract mean the invoices come off the balance sheet?
No. The accounting test looks at who carries the risk, not at what the contract calls the deal. The FRS 102 example of receivables sold to a bank with a buy-back of debts over 120 days overdue is recorded as a loan, even though it is described as a sale.
Does bad debt protection make my facility non-recourse for accounting?
Not on its own. It depends on how much of the loss the lender or insurer really takes, and whether you still carry the risk of slow payment. Ask your accountant to read the facility agreement and any insurance terms together.
Does the percentage the lender advances decide the treatment?
No. A 98% advance with full recourse is still a loan in your accounts. What matters is whether you must pay the lender back when a customer pays late or not at all.
Which standard do I use, IFRS 9 or FRS 102?
Groups whose shares are traded on a UK regulated market must use international standards (IFRS) for their group accounts. Other companies can choose between IFRS and UK rules such as FRS 102. Your accountant will know which one your accounts follow.
Group accounts rule: Companies Act 2006, section 403.
Founder & Managing Director, Muswell Rose, founder and PSC of Best Business Loans Ltd
Adam was managing director of Penny, a UK invoice finance business, from July 2020 to November 2023. His career runs through insurance, mortgages, commercial finance and fintech lending. He writes the Market Invoice library. Career record.
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