Invoice discounting is an option for businesses looking to release the value tied up in their sales ledger. As an invoice finance facility, it is possible to release a percentage of the funds via a lender before the invoice is paid. When your business issues an invoice, the lender will be willing to provide some of the funds. This will provide your business with quick access to working capital.
Both invoice discounting and invoice factoring will provide access to capital. However, with invoice discounting your customer is unlikely to be aware of your cash flow financing arrangement. If you business uses this form of invoice financing, you will still remain in control of your sales records.
This means you can continue to collect outstanding invoice payments and issue reminders as usual. By retaining control of communications relating to invoice payment, your business can continue with its usual credit control and accounts receivable processes.
In general, factoring is an option used by smaller companies which may not have an established reliable turnover, or robust credit management processes. If your business does not have the resources to chase a large number of unpaid invoices, it may be worth considering invoice factoring. This would leave your business free to focus on its key activities, instead of spending time contacting a vast number of customers.
Invoice discounting is an agreement between your company and an invoice finance company, your customers are not involved. Once paid, the payment is passed across to the invoicing finance provider, who will then take their fee.
Those who you provide products or services to are not involved with the discounting provider, so the process is confidential. Businesses which access this type of business finance are responsible for chasing unpaid invoices, unlike those who opt for factoring invoices.
If you would like to keep your cash flow financing arrangement confidential, this may be the ideal solution for you.
This form of borrowing is increasingly being used by organisations which need strategic access to the cash tied up in their sales ledger. For example, if a business is looking to unlock cash tied up in invoices to make an acquisition or management buy-in.
Invoice discounting will not impact the way your customers pay their invoice, as you will still issue invoices for work which your company completes. This is then marked as accounts receivable, however the lender will pay the pre-agreed percentage of each invoice directly into your company bank account.
The amount available will depend on the exact terms offered by the discounting company.
You will need to send the lender a copy of the invoice and when processed, you will receive the cash required to improve your working capital. This form of lending can be used to fill the gap between raising an invoice and the date the bill is paid. By releasing cash quickly, you will have the funds required to plan for day-day-day activities in a sustainable and achievable way. It is a popular form of borrowing as the funds available match the performance of your business. There are no fixed repayment terms, which are offered with traditional loans and credit cards. The invoice discounting cash can be used to help cover company bills, although some may use these finance services as a way to pay for expansion plans.
The best way to help cash flow is to issue your invoices immediately after supplying your services, as you will receive regular payments each month. There will be a flexible rolling contract with the lender, who will release cash against the value of invoices each time they are raised. Once your customers pay their invoice, the money is sent to the invoice discounting lender.
If you have struggled with borrowing in the past due to a less than perfect credit score, you may still be able to access invoice discounting. This is because the lender will also be considering the creditworthiness of your customers.
Invoice discounting is a popular form of borrowing, so there are a variety of lenders which provide the service. These include banks and lenders which specialise solely in forms of invoice finance. Each lender will have certain criteria which you must meet, and invoice finance is only available to businesses whose customers are other businesses.
The invoice finance provider will need to see copies of your invoices, to see the exact amount owed and how many customers you work with. If you rely solely on a single customer, it will be more difficult to arrange invoice discounting. Although, the lender will consider your relationship with your customers and their previous willingness to pay invoices on time. You will also need to prove that you have strong credit management and reporting tools, with a management team capable of collecting late payments from customers. Your business has an increased chance of accepting if you can prove that you have been financially viable for at least 6 months. Each lender will have a different set of criteria, with some more flexible than others about their eligibility requirements. If you are concerned about finding a company willing to lend to your business, our team can help you compare options.
The invoice discounting company will charge a fee in return for paying the cash tied up in your invoices, before they are actually paid by your customers. The lender will deduct their fee from the remaining balance, so it is important you fully understand and budget for this when taking out this form of finance. By taking the time to budget effectively, you will ensure your business makes the most of the cash input available to you.
With so many alternative lending options available, it can be difficult to know which is the ideal option for you. Many choose invoice discounting because it can be less time consuming than applying for a traditional bank loan, as you are simply borrowing from cash which is already owed to your company. Although, it is worth bearing in mind that you will lose some of the profit your business is owed, due to the fee you will owe to the lender. In general, this form of borrowing is more widely available to established companies which meet the minimum turnover level required by the lender. It is also important to note that your clients should on the whole pay on time, with any issues quickly rectified using robust credit procedures.
Here at BusinessComparison we specialise in helping businesses compare everything from insurance and utilities to various forms of borrowing. If you would like to compare financial products to find the ideal funding for your business, we can help. With so many companies offering various forms of lending based on the value of your owed accounts, it is advisable to compare options to ensure you arrange the best contract. To find out more about invoice discounting or compare the options available to you, please contact our experienced team today.