Article – A Guide to Invoice Discounting

Invoice Discounting

Invoice discounting is a popular and flexible option for businesses who struggle with cash flow as a result of waiting for payments from customers. It uses the invoices as security and releases a cash advance to improve your company’s working capital.

Invoice Discounting Definition

Invoice discounting gives businesses the opportunity to get instant access to cash they are owed from unpaid invoices. The lender advances your company a percentage of the invoice as and when they are sent, enabling a boost in cash flow. This prevents the business having to wait potentially long periods of time to receive any income, whether that’s due to long payment terms or constant late payment issues. Invoice discounting can then assist in planning and budgeting your cashflow, making the business more efficient as a result.

How does Invoice Discounting Work?

1. Invoice Created

An invoice is generated based on the supply of goods/services delivered.

• Invoice Discounting

The invoice is then sold to the lender for an agreed percentage, usually around 85-90% of its value, it then provides immediate finance to the business.

• Customer Payment

The customer pays the invoice when due or shortly after, into a trust account that you and the lender has access to.

• Balance Receipt

The lender will then send the remaining balance back to the business, minus the agreed fees.

What can Invoice Discounting be used for?

Cash Flow Support

This is the most common use of invoice discounting. It provides the cash flow from unpaid invoices to businesses, so they don’t have to wait extended periods of time to see their revenue. This is a very frequent challenge for B2B businesses, where longer payment terms are more common such as having to agree to 30, 60 or 90 day payment terms.

To Support Growth

For successful growth, business funding is often needed, whether it be for hiring new employees, launching a new marketing campaign, or purchasing additional stock. Invoice discounting can be a viable path in order to get access to funds sooner in order to make deadlines and assist in budgeting.

Contingency/Emergency Fund

If an unexpected emergency were to occur, such as essential equipment breaking down, getting cash with short notice can be challenging. Invoice discounting gives a good middle ground between acquiring a long-term loan and having to use your own working capital.

Invoice Discounting Advantages and Disadvantages

Advantages

Speed

The fast-moving nature of invoice discounting effectively enables businesses to gain access to funding solutions quickly. Once an invoice is uploaded on a funders online portal, the funds are typically advanced immediately.

Flexibility

The business can choose the invoices they want to fund, rather than having to fund their entire debtor book. In addition, the amount of funding available increases with sales growth, providing an increase of funding without having to go through the whole application process again, as you would with a business overdraft as an example.

Control

Unlike invoice factoring, the business retains full control of its relationships with its clients, including chasing and collecting funds.

Improved Supplier Relationships

Because of the availability of cash, businesses can pay their suppliers sooner, maintaining good relationships for future arrangements and they can often negotiate an early payment discount.

Invoice Discount Disadvantages

Client Payments

While the business has control of its relationships with its customers, there is still the responsibility of chasing and ensuring the funds are received from them. However, this needs to be done anyway with or without the invoice discounting involved.

Credit Score

If a business repeatedly fails to pay you on time, it can have a negative impact on that client’s credit score and funding amount. This can have a negative effect on future credit limits available opportunities for that client.

Eligibility and Considerations

There are certain criteria a business has to meet in order to be eligible for invoice discounting. The cost will depend on factors such as the type of business and the nature of debt ‘receivables’ needed for funding and how string the credit control process is currently in place.

Contact Us – The Best Finance Group

If you have any enquiries about invoice discounting or are interested in reviewing all business options available to you, why not arrange a call with one of our dedicated and knowledgeable team. We will guide you towards the most suitable type of invoice discounting facility, with the lowest interest rates possible, from our whole of market lending panel.

Here is a video with a closer look at Invoice Discounting: