Invoice Discounting is very similar to factoring in that the invoice discounter advances an agreed percentage of the invoice value – typically 80 - even 100 % of the total amount. Invoice discounting is confidential such that the customer is unaware of the facility and the supplier is responsible for all sales ledger administration. In a nutshell, the provider will lend you the money, and you will remain in control of chasing up payments and other administration and your customers will not know a facility is in place.
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.
Invoice discounting works very similar to factoring, with a couple of differences. With an invoice discounting facility, you send a sales day book listing to the provider, instead of copy invoices, but still keep the responsibility for running the sales ledger, issuing statements, collecting payments and chasing slow payers if necessary.
You pay the money that you collect into a bank account called a trust account and notify the provider. 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.
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).
The principal advantage is that it gives your business an immediate injection of cash, usually within 24 hours, and the facility grows as your business expands. Having cash up front enables you to pay your suppliers more quickly and negotiate better terms as a result thus 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.
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.
Invoice discounting tends to cost less than factoring since you are not paying a third-party to manage your sales ledger.
Please call us on 01582 394809 or click here for a quote on invoice discounting .