Invoice Discounting - A Flexible Cash Flow Finance Solution
Invoice Discounting helps your business grow
Invoice Discounting and Factoring both fall under the general heading of Invoice Finance that is to say the ability to raise cash against the value of invoices (referred to as receivables). Both Invoice Discounting and Factoring often require less personal liabilities than most traditional forms of lending, as cash is secured against the future payment of invoices.
But there is one clear difference between the two methods of cash flow funding. With Invoice Discounting, the facility is confidential, and the business still retains responsibility for managing its own sales ledger, credit control and payment collection.
What is Invoice Discounting?
Invoice Discounting is similar to Factoring in that the Invoice Discounter advances an agreed percentage of the invoice value typically 80-90% of the total amount. It is possible to see a 100% cash advance rate from invoices although this is rare and usually only associated with the recruitment industry.
Invoice Discounting is confidential such that the customer is unaware of the facility and the supplier is responsible for all sales ledger administration.
Invoice Discounting can only be provided where goods or services are supplied between one business and another on credit terms. Bad debt protection may be included in the facility if required.
How does Invoice Discounting work?
Invoice Discounting works in much the same way as Factoring, with one or two differences. With Invoice Discounting, you send a sales day book listing to the Discounter instead of copy invoices, and retain responsibility for running the sales ledger, issuing statements, collecting payments and chasing slow payers if necessary.
You pay the money you collect into a special bank account (trust account) and notify the Discounter. The Discounter then pays you the balance of the invoice totals, less an agreed charge. Charges consist of a service fee as a percentage of your annual turnover and an interest charge on the funds advanced to you. These are negotiated with each business.
When should I consider Invoice Discounting?
Invoice Discounting suits those larger businesses with a higher turnover usually upwards of £250,000 that are sufficiently sophisticated and resourced to be able to manage their own sales ledger and are looking at alternative (or additional) methods of borrowing.
It is not untypical for Invoice Discounting to be used as a refinancing tool, or as part of a package of finance to facilitate a management buyout (MBO) or buy-in (MBI).
What are its advantages?
The principal advantage is that it gives your business an immediate injection of cash, usually within 24 hours, and the facility grows as yours business expands. Having cash up front enables you to pay your suppliers more quickly, and negotiate better terms as a result, taking full advantage of supplier discounts for early settlement. It also has the advantage of leaving you in charge of your sales ledger.
With Invoice Discounting, the amount of finance available grows in line with your turnover, i.e. the more invoices you raise the more cash that is made available to you. As it operates as a confidential service, your customers need never to know you use the service.
How much cash will I receive?
As with Factoring, you will be advanced up to 90% of the invoice value. What is particularly good about all forms of Invoice Finance is that the more invoices you generate, the more cash you will receive. It therefore especially benefits those businesses looking to expand.
How much does it cost?
Invoice Discounting tends to cost less than Factoring since you are not paying a third-party to manage your sales ledger.
See Invoice discounting in the press – Financial Times.
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