Invoice discounting is a form of invoice finance that is used by businesses to increase their working capital and improve cash flow. Where this service differs from other invoice finance options is that it allows you to retain control of the company’s sales ledger. Effectively invoice discounting permits businesses to withdraw funds against their sales invoices prior to the customer making payment.
As with other invoice finance options invoice discounting is only available to businesses that trade with other businesses on credit terms. In addition invoice, discounting companies are normally only prepared to provide these services to businesses that have an annual turnover in excess of £500,000 and a proven track record with credit control. However, it is worth noting that an increasing number of smaller businesses are being accepted for these types of arrangements.
Invoice discounting allows your business to raise invoices to customers on your company’s stationary; a copy of the invoice also needs to be sent to the finance provider so they can make payment against it. This payment, which can be up to 95% of invoice value, is normally processed immediately and can be drawn by your business within 24 hours. Once your company’s credit controller has secured payment from the customer you must then pay the finance provider the total invoice value. Upon this payment clearing the finance provider will return the balance owed, less the interest and their fees. Normally it is not required that customers or suppliers be informed that your business is using invoice discounting arrangements allowing total discretion.
As with factoring, invoice discounting companies normally offer both recourse factoring and non recourse factoring. In Recourse factoring, your company is taking on the risk of any bad debt that may be incurred from customers not paying their invoices. This means that recourse factoring can be less costly to your business than non-recourse factoring where the ‘factor’ (finance provider) takes on the risk of bad debt.
Recourse factoring allows the factor to claim their funds back from your business if the customer does not pay their invoice, the length of time after the invoice due date that a factor can claim their money back is always specified in your agreement with them. However, with non-recourse factoring it is the factor that incurs the debt if a customer does not pay the invoice, unless there is a genuine issue with the goods or services that have been provided. In non-recourse factoring the factor assumes all rights to pursue invoice payments with your customers and to commence legal action against them if they deem it necessary to recover the funds.
There are many advantages to invoice discounting and these include:
- Improved cash flow and financial planning as you do not have to wait up to 90 days to receive payment from your customers.
- Confidential – normally invoice discounting companies do not require you to inform customers or suppliers that you are using their services.
- Cash can be drawn against sales as soon as they are invoiced.
- Protection from incurring bad debt when non-recourse factoring is chosen.
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