Invoice discounting is a kind of short-term borrowing often used to increase the working capital or accelerate the cash flow of the company.
What it does is that the company gets a part of their invoices paid even before the final customer has paid his invoice. This is done by using the value of the open invoice as collateral. The amount that the factor pays on emission of the invoice can be up to 80% of the total value and can be paid within days. Obviously, as this is a loan, there is an interest to be paid on the amount borrowed. In this regard you could compare it with an overdraft. The finance company will also charge a monthly fee for this service.
With and without recourse
The deal struck between your business and the invoice disocunting company might be ‘without recourse’, meaning that the factor will accept any credit risk involved. The alternative is ‘with recourse’, where you retain the credit risk yourself.
Factors that provide invoice discounting on a ‘non-recourse’ basis can at times be quite picky about the type of clients that they choose to accept. They may reduce the initial advance offer against your invoices if they feel that your business comes into one of their high-risk categories.
 Advantages?
By receiving the cash as soon as the invoice is raised, the business will improve cash flow and working capital.
The interest paid is only on the funds that it actually borrows, pretty much like an overdraft which makes it more flexible than debt factoring.
Financing through the invoices can be arranged confidentially so that customers and suppliers are unaware of this arrangement.
Drawbacks ?
Invoice discounting is a more expensive form of financing compared to overdraft or bank loans.
Who can use invoice discounting?
There are a variety of options available to any business that is looking to use an invoice discounting company, which as a result means that it is available to most kinds of business enterprise.
There is, of course, a set of basic requirements that must be met if any business is to go down the path of invoice discounting, so it is important that you take a look at all the different aspects that confirm how suitable your business is for getting finance on your sales ledger.
- Turnover – A business would generally need to have a turnover of at least £50,000 a year for it to be deemed suitable for invoice discounting. The obvious reason for this is that the factoring companies take a certain percentage of the businesses turnover and this inevitably must reach a certain level before it starts to become profitable in order for them to help.
- Credit terms – In order to be suitable for this type of financing, the business must offer credit terms for their customers of between 30 and 90 days. They must also have a large number of unpaid invoices outstanding. Businesses that already deal primarily in cash sales will often not be approved as they do not really need invoice factoring services or invoice financing, since their cash flow is evidently fine already.
- Type of business – The business must provide services and/or products to other businesses if they are to be eligible for invoice discounting. Most invoice discounting companies will only work with businesses based in the UK, but some do work with international customers. A business is more likely to qualify for this type of cash funding if they have a wide spread of customers, as factoring companies can be quite wary of providing cash lending services to businesses that rely too heavily on one of two customers.
Do ensure that you have checked the eligibility of your business before applying for invoice discounting. You can obtain a free quote from factoring companies by using our main Companeo website.
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