Tuesday 12nd Dec 2017
Invoice discounting is an increasingly popular form of business funding, which is quite different from a lot of the more traditional finance products that you’re likely to see on the market. However, just how popular is it in reality? Is it something that a lot of businesses use? Is it more popular among certain types of business than others? We’re going to take a quick look here at the number of UK businesses that use this type of finance in their day to day operations.
Overview of Invoice Discounting in the UK
As common as it might be, many are still unaware of what exactly invoice discounting entails. Firstly, it’s important to note that invoice discounting comes under the umbrella term of invoice finance, and is different to invoice factoring. We’ll cover the difference in a second.
Discounting is actually straightforward. When a business raises an invoice for goods or services, the finance provider will pay them most of the value of this invoice straight away. Usually this is around 85%. When the customer eventually settles the invoice and the money goes to the invoice provider, the remainder of the value will be given to the business, less any fees and interest. The upshot is that invoices can be instantly realised - there is no waiting around for cash flow.
The difference between discounting and factoring is that with discounting the agreement is confidential. With factoring, customers are aware of the setup, and deal with the finance provider in cases of collections. There are some other technical differences, but this is the defining difference.
What are the Numbers?
The 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 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.
Because of the benefits that discounting can bring, it’s generally favoured by those businesses that have real issues with supply chains. Manufacturing and distribution alone account for approximately half of all UK businesses using discounting. Companies in this industry naturally live by the realisation of their invoices, which are often paid late, as they are the last link in the chain. Invoice finance solves this.
Similarly, services take around 30% of the remaining market. There are lots of services businesses - recruitment consultants in particular - that run very lean financially, and they absolutely must be flexible. Invoice discounting means that they don’t have to worry about when an invoice is going to be settled, and it also means that they have the cash flow they need to be able to quickly take on new members of staff when they need to service bigger contracts.
A final point to note is the fairly even spread of business scale. You might expect invoice finance to be used only be very small businesses, but in fact around 1 in 10 have a turnover greater than £10 million per year. That said, around a third have a turnover of less than half a million. There is a lot of evidence to suggest that rapidly growing businesses use invoice finance, because it gives them the flexibility and cash flow they need.