Invoice discounting is a invoice finance facility that allows business owners to leverage the value of their sales ledger. When you send out an invoice to your customer, a proportion of the total amount becomes available from the lender, providing an invaluable source of working capital throughout the month.
This type of invoice finance is very similar to factoring, the main difference being that your customer may not be aware that you have taken on cash flow finance. You remain in control of the sales ledger, collecting payments as normal and sending out reminders. This allows you to maintain your own style of communication and standards of customer service, on which the success of your company relies.
How does invoice discounting work in practice?
On a day-to-day basis, you send out invoices as work is completed or orders fulfilled. The pre-agreed proportion of each invoice is deposited to your bank account once a copy of the invoice has been received by the lender. The money can then be used to pay bills, repay debt, or as part of a long-term plan for growth.
Sending out invoices immediately after work has completed is key to success with invoice discounting, as it allows for a regular influx of cash throughout the month. Once the agreed percentage of each invoice has been paid – generally around 80% to 90% of the total – you collect payment from your customer as normal.
Fees and charges are deducted from the remaining balance, and remitted to or claimed by the lender. Charges should be transparent and the fee structure made clear by the financier, however, along with all other invoice discount terms. This helps you to budget effectively, and make the best use of each cash input.
How do you know if invoice discounting is right for your business?
With so many alternative finance options now available, it can be difficult to know which one is the most appropriate, but invoice discounting could be a good option if:
- Your credit control procedures are robust, and known to be effective
- You have minimal bad debts
- Your customers pay on time in the main
- Customers have a minimum of 30 days in which to pay
- You meet the minimum level of turnover required by the lender
One of the main considerations when deciding on an invoice finance facility is whether you carry out credit management processes in-house. If not, invoice factoring may be more suitable.
Discounting services are generally more widely available to established businesses rather than start-ups which, by their nature, would not have reliable turnover and credit management processes.
SOURCE: REAL BUSINESS FINANCE