Understanding invoice discounting and how the process works

Invoice discounting has been revolutionised with our digital onboarding process

Invoice discounting company awards

How does an invoice discounting facility work?

Invoice discounting facilities allow medium-sized businesses to borrow money against the value of their unpaid invoices. Generally speaking, invoice discounting facilities are best suited to B2B businesses that offer long credit terms to their clients.

Invoice discounting can be invaluable to businesses that want to:

• Expand their operations
• Invest in stock, machinery or equipment
• Employ new members of staff
• Fix long-standing issues with cash flow

The invoice discounting process

To explain the process, we’ll pretend that you run a medium-sized manufacturing business that offers 90 day credit terms. Using an invoice discounting facility, you would follow a simple 5 stage process:

Supply your clients with goods, and then invoice them as per your normal practices Forward a copy of your invoices to a finance provider After 24-48 hours, your provider will release funds to match a pre-arranged percentage of the invoice’s value (normally between 70-90%) When your debtor settles the invoice, your provider releases the rest of the invoice’s value minus a small service fee.

Is invoice discounting right for my business?

Generally speaking, invoice discounting facilities are best suited to companies that sell to other businesses on credit terms turnover more than £250,000 a year

What are the advantages of using an invoice discounting facility?

Boosts cash flow

The biggest advantage of invoice discounting is that it can significantly boost cash flow. Businesses up and down the country often struggle with their balance of cash, and much of the time this is not down to poor revenue, but late payments by customers. The idea behind all forms of invoice finance is that you no longer need to wait 30 days, 60 days, 90 days or even longer for your outstanding invoices to be paid. Instead, as soon as you’ve delivered and raised an invoice, your finance provider will pay you most of the value of the invoice, which is usually around 85%. This cash is then free for you to use for whatever you need, whether it’s the typical monthly expenses, or to fuel growth. Once the customer pays the invoice, you also get the remainder of the value of the invoice, less fees and interest.

Confidentiality

When compared with some other invoice finance products, and invoice factoring in particular, discounting carries the benefit of being entirely confidential. Some other products will reveal that you’re using a finance company for your invoices to customers, but with discounting everything is kept between you and your factor. This is ideal if you’re looking to maintain relationships with customers, and feel that you have everything otherwise under control.

Requires no renegotiation

Invoice discounting is often chosen as an alternative to other finance products because it’s an ongoing agreement that you don’t need to constantly renegotiate. Unlike a loan, the facility keeps on rolling for as long as you want to pay the account fee. And as your turnover increases, your agreement will automatically change based on what you agreed at the beginning, such as with different fees and rates etc. Lots of businesses therefore choose to grow with their invoice finance agreement, and see it as an essential part of their financial plan.

Isn’t a long term debt

Our final point is that invoice discounting is often seen as a less risky form of borrowing, because you’re not borrowing large amounts of money without a clear revenue source in mind. With invoice finance, the money being lent is directly against a specific invoice, which makes it a more manageable type of finance product that can be easily planned for. However, as with any other financial agreement, it’s always worth seeking out the advice of an independent advisor before you decide if it’s right for your business.​