What is Invoice Discounting?
For the vast majority of businesses, debtor balances are by far their greatest asset. They also usually turn into cash at a much slower rate than a business would like, often representing two or three months’ sales.
If you're considering invoice discounting, you probably already know that having more working capital will help you realise your business potential faster. Whilst Invoice Discounting will reduce pressure on your cash flow, an overdraft is the equivalent of a company straightjacket.
Invoice Discounting provides the complete answer to -:
- Slow-paying customers
- Shortage of working capital
- Protection against bad debt losses
Put very simply, Invoice Discounting is a loan that is made to a business by a bank or another financial institution, that is secured against the value of its outstanding invoices (money owed to the business, by its customers).
Up to 95% of the value of your outstanding invoices are made available to your business the next working day. The remainder is made available when the customer pays.
Invoice discounting is available in the UK market for businesses with sound credit control procedures, with turnover ranging from as low as £150k to over £100m.
Benefits Of Invoice Discounting
- Immediate Working Capital - The more sales invoices you generate, the more working capital is made available to you.
- Freedom - to obtain early payment discounts and more favourable terms from your suppliers.
- Discretion - The confidential nature of an Invoice Discounting facility ensures that your customers do not become aware of the fact that you are financing your debtors.
- Control - Retain complete control over sales ledger management and collections.
- Flexibility - No need to constantly renegotiate your facility.
- Certainty - Availability of finance keeps pace with your business growth, as finance is made available to your business in line with the level of its sales.
- Better Financial Planning - An Invoice Discounting is granted for a fixed period of time (usually at least 12 months, but more often for 24 months) and as such enables more accurate financial planning.
The money raised from an Invoice Discounting Facility can be used for any purpose, from repaying your existing bank overdraft and releasing directors from personal guarantees and bank charges over private property, to helping you finance a major acquisition.
Disadvantages of Invoice Discounting
As with all forms of finance, Invoice Discounting has a number of detrimental factors that must be taken in to account, before entering in to an agreement with a Invoice Discounting provider. These include -:
The cost of an invoice discounting facility will reduce the profit margin on each order or service that your business transacts.
It may reduce the ability of your business to take on further borrowing – an invoice discounter will take a direct charge over your book debts, which often represent the majority of a business’s assets that can be put up for loan security.
An invoice discounter will almost always want to run a credit check on your customers and as such may influence who you do and don’t do business with.
All invoice discounting agreements have notice periods. If you wish to leave an arrangement early, you may be liable for the expected service income and sometimes interest margin, that the invoice discounter might have been expected to have made in the outstanding period of the agreement.
It may be difficult to end an arrangement with an invoice discounter as you will have to find other sources of external finance to pay off any money they have advanced you, on outstanding invoices.