Invoice Discounting Explained
Invoice Discounting is a form of invoice finance which enables you to raise funding via your unpaid invoices, without having to wait the 30, 60 or 90 days to be paid by your customer.
Invoice Discounting will improve your cash flow, offer you the option to protect your business from bad debt and unlock the tied up value in your invoices.
How does Invoice Discounting work?
With Invoice Discounting, you raise an invoice to your customer as per usual on your normal company stationery, send it to your customer and then present the finance provider with a copy to authorise payment. Typically, 75-85% of the invoice value can be released by the finance provider subject to individual circumstances.
Invoice Discounting differs to Invoice Factoring in one distinct way, in that the collection of payment on your outstanding invoices remains your obligation. With Invoice Factoring, the Factoring provider will arrange for their in-house credit control team to contact your customers. With Invoice Discounting, you are still in full control of your credit control and any payment collection from your customers.
When your customer pays the outstanding invoice, the finance provider (i.e. Invoice Discounter) will then require that you pay the outstanding balance for that invoice by paying the monies into your own client account with the Invoice Discounter. Once the funds have cleared, they will send you the ‘balance owed’, less their fee. The balance owed is the margin (typically 15-25%) of the invoice that is not financed. The monies owed on the outstanding invoice will always be paid by the debtor to the Funder, at which point they will release the remaining value on the invoice .
If your business already practices sound credit management, and has the staff and systems to generate rapid customer collections, the factor’s skills may not necessarily be needed and so Invoice Discounting may be the better alternative. Invoice Discounting turns debtors into cash faster, and generates the maximum working capital from your sales ledger balance.
Invoice Discounting is ideal if you have an annual turnover above £500,000 and an established credit control function. It enables you to quickly inject capital into your business, without having to deal with banks or sacrifice equity. Invoice Discounting is a quick way to free up money, without changing your established credit control procedures. Unlike bank overdrafts, it’s a flexible facility that grows with your business. Furthermore, in the current economic climate, it’s one of the fastest growing forms of commercial borrowing, both for SMEs and mid sized corporates.
If your business has issues managing late payments, then Invoice Factoring would likely prove to be a better choice in that the Factoring provider, with specially trained staff, will be better equipped and experienced in managing late payments.
The benefits of Invoice Discounting include:
• Improved cash flow: you no longer have to wait up to 90 days or more to get paid.
• Up to 90% of invoice value available when you bill your customers.
• There is an option to combine the facility with Bad Debt Protection to minimise the risk that failing customer businesses can have on your business.
• Cleared funds can be in your account the day after you raise your invoice.
• You retain control over your credit control function.
• It’s flexible. The facility will grow or reduce in relation to your level of outstanding invoices.
• It’s considered less risky than traditional commercial finance in that the scenario of falling behind with loan repayments (if you only use invoice finance) is not an issue.
Invoice Discounting is an excellent way to improve cash flow and its use appeals to a diverse range of businesses, such as manufacturers, wholesalers and distributors, service companies and recruitment firms.
Invoice Discounting works well if:
• You are a business to business company in the UK
• You have an annual turnover above £500,000. However at Factoring Finance we can still assist businesses with turnover of £100k or more.
• You issue invoices with trade credit terms from 14 to 90 days
• You have an established and well-run credit control function
Typical interest charges range from 1.5 percent over base rate to 3 percent over base rate. Interest is calculated on a daily basis. These rates are roughly equivalent to bank overdraft rates and can even be more advantageous.
Invoice Discounting typical fees range from 0.2 percent of turnover to 0.5 percent of turnover. These fees are less because only finance is provided.
Credit protection charges will be levied in non-recourse factoring arrangements, where the factor is liable for any bad debts. The amount will largely depend on the factor’s assessment of the level of risk. Typical charges range from 0.5 percent of turnover to 2 percent of turnover.
For more information on Invoice Discounting, or any other form of Invoice Finance, please visit the Factoring Finance website, or call us directly. We are an independent Invoice Finance Specialist and are not therefore tied to any one finance provider, meaning that we source the best package that is right for your needs.