What is invoice discounting and how does it work?

Invoice discounting opens the doors to swift access to the funds nestled within your accounts receivable ledger, comprising unpaid customer invoices. No longer must you patiently await customer payments. Instead, you can promptly secure a short-term loan from an esteemed invoice discounting company.

These reputable entities willingly extend loans of up to 95% of your invoice value, ensuring that the much-needed funds find their way into your hands within days, rather than languishing for weeks on end. Once your customers fulfill their financial obligations, you can effortlessly repay the loan.

Invoice discounting, a prominent method of invoice financing, stands apart from invoice factoring on numerous fronts. However, confidentiality reigns supreme as one of its paramount distinctions.

Unlike the noticeable nature of invoice factoring, where third-party involvement becomes challenging to conceal, the utilization of invoice discounting providers remains entirely concealed from your esteemed clientele.

Safeguarding the privacy of your financial arrangements, invoice discounting empowers you to maintain an unwavering facade of autonomy and control, free from customer interference. Embrace the transformative power of invoice discounting, the key to expediting access to your owed revenues

How does invoice discounting work?

Invoice discounting is a financial arrangement that allows businesses to access the funds tied up in their accounts receivable ledger.

Here’s how it typically works:

1. Generating invoices: The business provides goods or services to its customers and generates invoices for the amount owed.
2. Choosing an invoice discounting provider: The business selects a reputable invoice discounting company to partner with for accessing funds against their outstanding invoices.
3. Loan application: The business submits an application to the invoice discounting provider, detailing the invoices they wish to discount. The provider assesses the creditworthiness of the business and the quality of the invoices.
4. Loan approval and funding: Upon approval, the invoice discounting provider advances a percentage of the invoice value, usually up to 95%. The funds are typically transferred to the business’s bank account within a few days.
5. Customer payment: The business continues to manage its sales ledger and is responsible for collecting payments from customers. The customers make payments directly to the business as per the usual payment terms.
6. Loan repayment: Once the business receives payments from customers, they use the funds to repay the loan to the invoice discounting provider. The repayment amount includes the advanced funds, plus any applicable fees or interest.
7. Ongoing process: The business can repeat the invoice discounting process as needed, continually accessing funds against new invoices to improve cash flow.

In summary, invoice discounting provides businesses with a flexible and confidential way to accelerate cash flow by borrowing against their unpaid invoices.

It allows them to maintain control over their sales ledger while gaining quick access to the funds they need for operational expenses, growth initiatives, or other financial obligations.

The advantages of invoice discounting

The benefit of invoice discounting lies in its ability to ensure prompt payment, revolutionising your cash flow dynamics, particularly when dealing with clients notorious for delayed payments. A robust cash flow stands as a lifeline for your business, playing a pivotal role in its resilience and prosperity.

Moreover, invoice discounting finance offers an array of advantages that surpass the complexities and costs associated with traditional bank loans. Consider the following:

• Simplicity and Affordability: Invoice discounting finance presents a streamlined and cost-effective alternative to navigating the intricate processes of obtaining a bank loan. The straightforward nature of invoice discounting ensures a hassle-free experience while reducing financial burdens.
• Enhanced Approval Chances: Unlike the stringent requirements often imposed by banks, invoice discounting providers are more inclined to approve applications. This increased likelihood of approval empowers businesses to secure the necessary funds swiftly and efficiently.
• Predictable Revenue Stream: Embracing an invoice discounting service bestows businesses with a more predictable revenue stream. This invaluable stability facilitates meticulous business planning and precise forecasting, empowering you to seize emerging investment opportunities with confidence.

The capital obtained through invoice discounting can be allocated strategically, catering to a myriad of business needs. Whether it be hiring temporary staff during peak seasons, expanding your stock or raw material inventory, weathering challenging trading periods, or making forward-looking investments, the flexibility provided by invoice discounting allows you to make shrewd financial decisions aligned with your business goals

Differences between invoice discounting and invoice factoring

Although both invoice discounting and invoice factoring provide advances against unpaid invoices, they operate in distinct ways. Invoice discounting functions as a loan, while invoice factoring entails the purchase of unpaid invoices at a discounted rate. While this distinction may seem subtle, it holds significant importance.

Firstly, invoice factoring companies typically take control of credit management. This means they directly engage with your customers and pursue late payments on your behalf, freeing you from the task. However, this approach may impact how your customers perceive your business.

Invoice factoring can be non-recourse, meaning that if you sell an invoice to a factoring company and the customer fails to pay, you are not responsible for repaying the funds yourself. Although non-recourse factoring incurs higher fees, it can provide peace of mind in certain situations. On the other hand, invoice discounting, being a loan rather than a sale, always requires repayment, making non-recourse invoice discounting generally unavailable.

Before purchasing your invoices, invoice factoring companies conduct credit checks on your customers. This process helps identify potential unreliable payers, enabling you to filter them out. Invoice discounting, however, places the responsibility of customer vetting on you.

Invoice discounting and invoice factoring are associated with different risk factors. Discounting poses a higher risk for lenders compared to factoring. Consequently, large companies with dependable customers often opt for invoice discounting, while smaller companies tend to resort to invoice factoring, not necessarily by choice but due to its greater accessibility

Confidential invoice discounting

Invoice discounting offers a unique advantage to companies seeking confidentiality compared to invoice factoring. By opting for invoice discounting, none of your customers need to be aware that you are utilizing an invoice finance service. This discretion has earned invoice discounting the moniker of “confidential invoice discounting.” While it is possible to have confidential invoice factoring as well, it is generally less popular and more intricate in its implementation.

If your goal is to swiftly receive payment for your accounts receivable ledger while keeping your use of invoice finance products hidden from customers, invoice discounting is likely the ideal choice.

Moreover, it allows you to retain control over chasing invoices, which can be both advantageous or disadvantageous depending on the creditworthiness of your customers

How to implement invoice discounting

The first crucial decision to make is whether you prefer to pursue discounting for your entire accounts receivable ledger, commonly known as whole turnover invoice discounting, or selectively discount only specific invoices, known as selective invoice discounting. It’s important to note that smaller businesses may face limitations in implementing selective invoice discounting since invoice discounting companies typically prefer to diversify their risk across a wider range of invoices.

Next, reach out to multiple invoice discounting providers and carefully compare their services and fees. If feasible, seek references from their customers, which are typically provided anonymously but can still offer valuable insights to help you make an informed decision. It’s advisable to consult with your accountant before finalizing your choice, as they may provide valuable advice based on their expertise.

Once you have chosen an invoice discounting company, they will provide guidance throughout the process. This includes establishing payment arrangements, setting up a trust account for customer payments if necessary, and integrating with your invoicing system to expedite prompt payment. In many cases, these tasks can be conveniently completed online, particularly if you are utilizing cloud-based invoicing software.

Frequently asked questions

Is invoice discounting a good idea?

Yes, invoice discounting is a good idea for most businesses facing cash flow problems as it helps to generate sales and increase ROI while having the liquidity to optimise the business operations. Generally speaking, most financiers prefer 60 days payment terms.

What is invoice discounting UK?

Invoice discounting in the UK allows you to finance your sales ledger on an ongoing basis and release funds against unpaid invoices. It can help you to manage cash flow, so you can plan ahead with confidence and invest in staff, materials and equipment, while you're waiting for customers to pay.

Is invoice discounting regulated in the UK?

No, invoice discounting is not regulated in the UK. Invoice finance services are not currently regulated by the FCA (Financial Conduct Authority). To ensure integrity and a fair service is provided, UK Finance have an industry-wide code of conduct.

Conclusion

In conclusion, invoice discounting offers businesses a flexible and efficient solution to improve cash flow by unlocking the value of their outstanding invoices. Whether you prefer whole turnover invoice discounting or selective invoice discounting, this financing option provides the means to access funds quickly while retaining control over your credit management.

If you’re interested in exploring how invoice discounting can benefit your business, take the next step by completing an online enquiry. Our dedicated finance team is ready to assist you and will promptly make contact to discuss your specific needs and guide you through the process. Don’t miss out on the opportunity to optimise your cash flow with invoice discounting – get in touch today!