Monday 29th Oct 2018
Invoice discounting is an increasingly popular form of business funding that’s used by thousands of British companies. Unlike invoice factoring, discounting is normally confidential so it can be hard to determine exactly how many UK businesses are using an invoice discounting facility. That said, organisations like the Asset Based Finance Association (ABFA) estimate that approximately 1% of British businesses were using some form of invoice discounting facility, and that number is expected to grow year-on-year.
In this article, we’re going to take a quick look at why invoice financing is becoming so popular, before delving into a detailed exploration of the numbers.
How do small businesses deal with cash flow problems?
First things first, it’s important to understand that invoice discounting is one of several finance solutions that are specifically designed to help businesses that struggle with cash flow problems.
Cash flow problems occur when outgoings (including wage payments, rent or the cost of purchasing new stock) are higher than incoming payments - normally because you are waiting for clients to settle their invoices or make payment for goods that they’ve already received.
Businesses in this situation often survive on credit or savings, but it can still be a real struggle to survive without a steady stream of working capital. Particularly if you want to employ new members of staff; improve some of your internal processes or grow your business so that you can tackle larger jobs.
For a small business with cash flow problems, some form of invoice financing is often key.
What types of funding are available for small businesses?
The two main types of invoice funding include invoice factoring, and invoice discounting.
Invoice discounting allows you to release the value of unpaid invoices as soon as they’re raised. Using an invoice discounting facility, you simply bill clients in-line with your current processes, then send a copy of any new invoices across to your lender.
After a short (24-48 hour) wait, your lender will then release funds up to 85% of the invoice total value; allowing you to maintain positive cash flow, and invest money while you’re waiting for clients to settle their accounts.
Invoice factoring works in much the same way, except for the fact that the lender normally collects on the debt.
How many businesses use invoice discounting?
The inherently confidential nature of invoice discounting means that it’s not always easy to know just how many businesses are using it as one of their funding sources. However, studies have been done (mostly conducted by the Asset Based Finance Association (ABFA)), and we can get a fairly good view of how common it is.
Estimates would suggest that the split between discounting (confidential) and factoring (disclosed) is around 60% against 40% respectively, and potentially even further in favour of the confidential option, as you might expect. What further separates this is the amount of money involved - whereas a billion or two are raised from factoring each year by British businesses, the figure is almost twenty times that for invoice discounting.
Overall, there are more than 44,000 businesses in the UK that use some form of invoice discounting, which means that almost 1% of all businesses use it. If we break that down, we can expect to see around 27,000 UK businesses regularly using discounting. This is many more than a lot of people would expect, and the share becomes much higher when you look proportionally into different industries.
Should I be using invoice discounting?
If you’d like to know whether your business would be a good fit for an invoice discounting facility, you will find detailed information here. It’s always worth getting input from independent business and finance experts in this regard too.