Invoice discounting

With invoice discounting, your business can better manage cash flow — by unlocking monies tied up in unpaid invoices.

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What is invoice discounting?

Invoice discounting enables you to release money tied up in unpaid invoices — helping you maintain cash flow and support business growth. Any money realized can be used for anything from — paying wages to purchasing more stock.

Invoice discounting is also known as confidential invoice discounting, and is a type of invoice finance. It can also be seen as a form of alternative finance.

Invoice discounting — considerations

Invoice discounting is one of the fastest growing forms of asset-backed, alternative funding — for companies that invoice customers regularly. It allows business owners to access cash tied up in outstanding invoices, before customers actually pay — for any goods and services rendered.

There are a variety of invoice discounting houses out there. These companies can release money to you — in a matter of hours. Lenders rarely advance the full amount of an invoice — instead they release only a percentage of the value.

Invoice discounting is typically confidential — as you continue to deal with your customers as normal i.e. customers will not be aware that you are using the facility. The disadvantage to this is that, you will need to chase outstanding invoices yourself — in contrast to invoice factoring.

Invoice discounting can also be seen as a type of secured business loan — where you use unpaid invoices as collateral. Lenders are more willing to advance you the funds — seeing as other customers essentially owe you money.

Working capital and cash flow, are key to the success of any company. Invoice discounting provides a way to better manage these aspects of business — through getting paid faster.

How does invoice discounting work?

Fundamentally, invoice discounting works by you selling your unpaid invoices to a lender — at a discount. The lender would give you a cash advance — based on a percentage of the invoices total amount. This percentage is usually at or around 80%. Once a customer pays off the invoice — you receive the remaining balance, minus any service and discount charges.

The invoicing facility provided can be either recourse or non-recourse. A recourse facility, means you are liable for the costs of any unpaid customer invoices — while non-recourse (bad-debt protection), means that the lender absorbs the costs of any customer default. Unsurprisingly, bad-debt protection comes with extra fees.

Benefits of invoice discounting

  • Increased cash flow
  • Quick access to cash
  • Retain control of your sales ledger
  • No hard assets required as collateral
  • Allows you to make more sales — based on credit

Limitations of invoice discounting

  • May be difficult for smaller businesses to obtain the credit
  • Invoices normally need to be from very reputable organizations
  • Short-term financing — higher cost
  • Over-reliance on the facility

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