Invoice Discounting

Invoice Discounting provides the means to grow your business

Invoice discounting (also referred to as Invoice Finance) allows a business to borrow money, secured against its sales invoices for goods or services which have been delivered. The invoice discounting company (discounter) will lend a percentage of the value of the business's sales ledger, effectively using the unpaid sales invoices as collateral for the borrowing.

When a business enters into an invoice discounting arrangement, the discounter will allow the business to draw down a percentage of its outstanding sales invoices - usually in the region of 80%. As customers pay their invoices, and new sales invoices are raised, the amount available to be advanced will change, so the maximum drawdown remains at 80% of the sales ledger. The discounter will charge a monthly fee (service fee) for their service as well as interest on the amount borrowed.

Responsibility for raising sales invoices and for credit control stays with the business, so the facility can remain confidential to your customers (Confidential Invoice Discounting/CID).

The discounter will require regular management information reports and updates on the sales ledger and the credit control process. Confidential invoice discounting is generally only available to established companies with good internal systems or where directors can demonstrate previous good business experience, but some funders will consider new starts if there is a strong business case. A disclosed invoice discounting facility may be offered as an alternative in certain circumstances.

It should be noted that invoice discounting companies may refuse to lend against some invoices, for example if they believe the customer is a credit risk or, they may impose concentration limits on the amount of lending to any one particular customer.

Generally discounters will only lend against debts which are under 120 days old.

The discounter will require a debenture over the company’s assets in addition to director’s guarantees or warranties.

Key Features

  • Facilities are based on future sales and can be put in place quickly
  • A competitive market keeps prices down
  • Growth in sales is immediately reflected in the level of funding which is available
  • Discounters develop a very close relationship with their clients and can react very quickly if new opportunities arise
  • The facility is usually confidential
  • Discounters stay close to their collateral, so will lend significantly more than overdraft providers
  • Can be used in conjunction with other sources of finance such as asset finance
  • Discounters will generally be flexible and may allow short-term additional borrowings.

Are there any disadvantages?

  • Fall in sales can have an impact on cash availability
  • If invoices become more than 90 days overdue the funding will be withdrawn and new invoices may not be funded in whole or in part until the old invoice is paid
  • Businesses with a small number of very large customers may find concentration restrictions on some customers
  • Generally more expensive than overdraft finance (although more funding is usually available).

5 Reasons your firm should use Invoice Discounting (Invoice Finance)

  1. Invoices = access to cash within 24 hours. You are no longer at the mercy of customers taking extended credit periods
  2. Access to cash means ability to pay suppliers promptly and puts you in a position of strength to negotiate discounts
  3. Immediate access to cash allows you to buy more products to fulfil more orders, thereby increasing sales and profits
  4. Invoice Finance can include bad debt protection so, even if your client fails, you still get paid
  5. The funder can give you credit information about potential new customers and markets. This helps to identify if new customers are credit-worthy and therefore likely to pay you.

Invoice finance is a dynamic way to finance your business. SMEs all over the UK are finding it of benefit. Don’t get left behind by assuming an overdraft is the only option you have to develop your business – give us a call to discuss how invoice finance can work for you.