Invoice discounting

Invoice discounting

What is invoice discounting?

Invoice discounting is one of the simplest forms of invoice financing. With the help of invoice discounting you can sell unpaid invoices to a lender and in return they will provide you with a cash advance which is usually a percentage of the invoice’s value. When your client has to pay for the invoice, the lender is supposed to pay you the remaining balance after the deduction of their fee.

Another way of understanding invoice discounting is that it can be seen as a series of short-term business finance which is availed using invoices as a security. In other words, the lender is known to the fact that you owe the money, so they lend you most of the amount of it before the customer actually pays you.

Invoice discounting is usually kept confidential and thus sometimes called 'confidential invoice discounting' and as a result you can continue to deal with customers yourself as is there is no involved third party, your clients won’t know that you are using a finance provider. 

                   

Invoice discounting example

Bob’s has just begun his business with a discounting facility with The Invoice Company for helping with cash flow, and Bob issues an invoice to his client worth $10,000 for the work that is already completed. Bob’s agreement with The Invoice Company describes that the initial percentage or advance percentage is 75% and this means that Bob is advanced $7,500 by The Invoice Company as soon as he raises the invoice.

Usually, Bob will be uploading the invoice over his online account with the finance provider and then he receives the advance.

Bob’s client settles the invoice within a few weeks, paying $10,000 into a business account which is controlled by the finance provider. With the help of confidential facilities, from the client’s point of view, it will look like they’re paying Bob directly.

Further the Invoice Company pays Bob the remaining $2,500, deducting their fees. The fees are typically around $250-300, so Bob would be receiving between $2,250 and £2,200 in this example.

Key features

●        Invoicediscounting is seen as an alternative solution for traditional types of business finance.

●        It can provide you with instant access towards the cash tied up within the outstanding invoices.

●        It can easily adapt with the changing and growing businesses, making it much more flexible than any other overdraft or loan.  

●        You can have control over the collection of payments, which makes this facility entirely confidential.

Who uses invoice discounting?

Invoice discounting are particularly suited to businesses in areas such as:

●        Construction

●        Recruitment

●        Manufacturing

●        Wholesale

●        Printing and publishing

●        Courier and logistics

But for any business which provides goods and services to other business organizations and facilitate client’s credit terms of 30-120 days (after the task has been completed), invoice discounting can solve the associated problems with slow payment.

Invoice discounting can be seen as a useful option for:

●        Business start-ups — flexible start-up loans are made available to get the new company off the ground

●        Growing businesses — putting your tied cash back to work for your business as soon as it is earned

●        Struggling businesses — It tends to bridge the gap between invoicing the customers and getting paid for the service provided.