Loading ...
The practice of invoice discounting is something used by a large amount of businesses, in order to raise more working capital and improve the cash flow of the business. Essentially it means that businesses can take out funds before they have actually received the money from their invoices, therefore meaning that they can get to the money a lot earlier. The main advantage though is that, unlike other types of invoice financing, the business will get to keep full control over their sales ledger.
Obviously the largest precursor to being able to use this type of invoice financing is that the company must be one that regularly invoices other companies for goods or services, therefore meaning that they operate on credit a lot of the time. As well as this proviso, companies that provide invoice discounting services usually only work with businesses that have an annual turnover of more than $500,000, as well as a good history of paying off their debts and controlling their credit. This is not always the case though, so it is often well worth enquiring even if your business is not this large.
Invoice discounting basically means that you can send invoices as normal to your clients, but then you also send the invoice to the invoice discounting company that you have chosen. They will then release up to 95% of the invoice amount to you within 24 hours, which therefore means that you don’t have to wait for ages for the customer to pay you. You then pay the invoice discounting company the money back – plus interest – once the invoice has been paid by the customer. There is generally no need to inform any customers that you are using an invoice discounting service at all.
If you are familiar with factoring, then you will understand about recourse factoring and non-recourse factoring – two things that are also offered when it comes to invoice discounting. With recourse factoring, it means that your business risks debtors not paying their invoices, as you will still have to pay back the loan taken out against the invoice. The upside to this though is that it usually costs a lot less, as there is no risk being taken by the lender.
Non-recourse factoring, however, is usually more expensive as the lending company takes the risk, not you. This means that should a customer not pay their invoice, the lending company takes the financial hit and your business does not lose anything. Should there be a genuine reason why you haven’t received payment though – such as poor goods or services – then the lender can demand the money back from you, which can elevate to legal disputes.
Invoice discounting has a number of large benefits, including:
- An improvement to a business’ cash flow, as there is no need to wait huge amounts of time for an invoice to be paid (often up to 90 days).
- It is confidential, so your customer base does not need to know about you using this service.
- As soon as sales are made, you can draw cash on them.
- Choosing non-recourse factoring will protect you from bad debt.
