What-is-invoice-discounting-Is-it-the-right-finance-facility-for-my-business

What is the most appropriate type of funding for your business?

Invoice discounting is a financing option that allows business owners to use the value of their sales ledger. When you send an invoice, a part of the total amount is made available by the lender, providing essential working capital during the month.

This financing is like factoring, but your customer might not know about the cash flow assistance. You keep control of the sales ledger, collect payments as usual, and send reminders. This helps you uphold your communication style and customer service standards, which are crucial for your company’s success.

 

How does invoice discounting work in practice?

Daily, you send invoices once work is done or orders are filled. An agreed-upon part of each invoice is deposited into your bank account upon the lender receiving a copy. This money can be used for bills, debt repayment, or long-term growth plans.

Swiftly sending invoices after completing work is crucial for successful invoice discounting, ensuring a steady cash flow throughout the month. After receiving the agreed percentage of each invoice, usually around 80% to 90% of the total, you collect payment from your customer as usual.

Charges are taken from the remaining balance and sent to the lender. The financier should be clear about fees and the fee structure, along with other terms of invoice discounting. This clarity helps you budget effectively and optimise each cash input.

 

How do you know if invoice discounting is right for your business?

With numerous alternative finance options now accessible, choosing the most suitable one can be challenging. 

Invoice discounting may be a good choice if:

  • Your credit control procedures are strong and proven effective.
  • You experience minimal bad debts.
  • Your customers typically pay on time.
  • Customers have at least 30 days to make payments.
  • Your turnover meets the lender’s minimum requirement.

 

When deciding on an invoice finance facility, a key factor is whether you conduct credit management processes in-house. If not, invoice factoring might be more fitting.

Discounting services are generally more accessible to established businesses rather than start-ups, which, due to their nature, may lack reliable turnover and credit management processes.

 

Negotiating the best invoice discount terms with lenders

With numerous companies offering loans based on invoice value, seeking professional advice on the most suitable type of invoice discounting contract for your business is wise.

If you don’t precisely meet the criteria mentioned earlier, some companies are more flexible with their requirements. Lenders might limit cash advances or charge higher fees if they perceive your industry as high risk. Understanding your standing with each lender helps identify negotiable terms.

Lenders might decrease fees after selling a certain number of invoices or provide credit insurance to mitigate non-payment risk from customers. However, the financial and accounting aspects of invoice discounting are just one aspect to consider.

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What other terms might you need to consider?

Invoice discounting is typically a confidential process, but there is a ‘disclosed’ option available. This involves including a statement on each invoice, informing customers that it has been assigned to a third party, but your company will still handle payment collection. 

Terms and conditions may also include ‘with recourse,’ giving the lender the right to reclaim money if your customer fails to pay. The alternative is ‘without recourse,’ which is useful if you have concerns about your customers’ long-term payment ability. Opting for discounting without recourse may incur slightly higher costs, as the agreement includes payment for a credit insurance policy.

In conclusion, the invoice discounting process presents various potential advantages for businesses across industries. Undoubtedly, the primary benefit is having a dependable source of working capital accessible throughout each month. This provides limitless opportunities, including the ability to plan for sustainable growth.

Vanguard Insolvency can provide the professional guidance you require when contemplating invoice discounting. We can advise on whether this finance option suits your business and help you grasp the detailed benefits it offers.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.