Wednesday 31st Jul 2019
What is invoice discounting?
Invoice discounting is a type of invoice finance that’s designed to help small to medium-sized businesses maintain good cash flow. By using an invoice discounting facility, you will be able to unlock funds from your outstanding invoices before they’ve been paid by your clients. You normally do this by:
- Issuing invoices as usual
- Forwarding a copy of all invoices to a lender
- Waiting 24-48 hours, until your lender releases funds matching a prearranged percentage of your invoices’ total value
Most invoice discounting facilities allow you to raise up to 85% of an invoice’s value, but the exact amount that you can leverage will depend on the terms that you agree with your lender. Invoice discounting is designed to help you improve cash flow and finance sustainable growth. It is popular with businesses that face cash flow challenges, or spend a lot of time chasing payments. Invoice discounting is also popular with businesses that have a lot of money tied up in their sales ledger, and want to leverage those funds to buy stock, employ new members of staff or purchase new equipment.
What is confidential invoice discounting?
By definition, most invoice discounting facilities are 100% confidential. Your clients won’t be told that you are raising money against the value of their unpaid invoices, and you’ll be responsible for collecting the final balance on all invoices. This means that you never have to worry about clients receiving unexpected communications from a 3rd party, or finding out that you are using an invoice financing facility.
Why do businesses use invoice discounting facilities?
Depending on your payment terms, clients can sometimes take up to 120 days to settle an invoice. Meanwhile, you have to pay all of the running costs associated with a modern business, including things like rent, wage payments and other monthly fees. You also have to order new stock, and/or invest in the growth of your business, which can put a real strain on your finances.
By using an invoice discounting solution, you ensure that you can access funds as soon as you invoice a client: Providing a steady stream of working capital that you can use to:
- Keep your business running smoothly
- Invest in new assets
- Invest in marketing campaigns, and other growth-related activities
Invoice discounting solutions can also help to smooth over some of the bumps caused by late payment, as well as insulating your business from seasonal trends. If you frequently find yourself at the mercy of your clients’ payment schedule, invoice discounting may be an excellent fit for your business.
Should my business be using invoice discounting?
Invoice discounting solutions are suitable for companies that sell to other businesses on credit terms, and turn over more than £250,000 a year. If you’re interested in invoice discounting and you’d like to learn more, head over to our dedicated page here. Do all the research you can, and build a business case for using such a facility.