Monday 11st Nov 2019
There are now dozens of different avenues to take when your business needs funding. Depending on your particular circumstances, there’s everything from the very traditional products like loans and overdrafts, to those more modern alternatives like crowdfunding. Non traditional finance products are lesser known, but do often offer benefits that the more generalized products can’t match, and they’re open to startups, SMEs and multinationals alike. Invoice finance is one of these funding options, and in this article, we’re going to look at a particular subset: confidential invoice discounting, and what it means and how it works.
What is invoice finance?
The premise of all invoice finance products is roughly the same. You’re using your unpaid invoices like, or as, collateral (the type of product may change this, but in principle things are the same either way). In practice this means that rather than waiting for an invoice to be paid within the normal 30- 60- or even 90-day terms, as soon as you raise it, you can have the money straight away. With most finance providers, you can get around 80% of the invoice value within 24 hours. This can be done with all invoices as soon as they come in - the agreement is rolling rather than having to negotiate each time.
What is the meaning of invoice discounting?
In this particular article, we’re talking about confidential invoice discounting. This is one of the two main types of invoice finance, and as the name suggests, is an agreement that is kept between the business in question and the finance provider. Clients and customers pay the invoiced money into an account as normal, but they are not made aware that a finance provider is involved.
What are the benefits of confidential invoice discounting?
Lots of businesses choose confidential invoice discounting, as it has numerous potential benefits. They include the following:
- Boosting Cash Flow
Benefits of this are mainly in relation to cash flow, which means that invoice finance is not designed for people who need funds that they can’t pay back until a later date. It’s for businesses who are operating well, but can’t realise the cash they’re owed quickly enough. The upshot is that it allows these businesses to be more agile. They can create cash quickly by supplying goods and services, and then this can be used for everything from new investments and opportunities, to normal monthly expenses. Cash flow is one of the biggest headaches for SMEs, even successful ones, so there’s little surprise that invoice finance is popular for a lot of businesses.
- Maintaining Customer Relationships
This is especially beneficial for businesses who want or need to introduce invoice finance as part of their accounting, but don’t want any of their relationships to change. Some customers for instance might change their opinions of the business if they know an invoice finance provider is being used. In addition, other forms of finance might mean that the finance provider takes control of collections activity, but again, established businesses are likely to have this well under control.
Naturally, there is a cost associated with invoice discounting - there’s usually a service fee that covers the administration of the facility, and then a small finance fee for each invoice. This finance cost is paid when the customer pays the money they owe and the invoice is settled, and is calculated as interest.
Is invoice discounting for you?
Ultimately, confidential invoice discounting is a good option for businesses that are successfully selling their products and services, but find that late payments or even non payments are making things more difficult than they need to be. It won’t change your relationship with customers, it’s often fairly cost effective, and it doesn’t require lots of negotiation and thinking about repayments. Of course, as with all financial decisions, it’s important to consult an independent advisor before you come to a decision - invoice discounting has many benefits, but isn’t for everyone. Read some case studies here.