With the economic climate as it is, it is becoming increasingly difficult for businesses to operate – to achieve financial success. In many instances, organisations will look to various sources of business finance to retrieve the funds needed to cover all of their financial requirements.
Businesses will often experience cashflow difficulties at the heart of any financial traumas. Trying to keep a company in a suitable financial position can often be a very difficult task, especially when there is little or no injection of funds to keep the company at a profitable stance.
Invoice Discounting: What is it?
Invoice discounting is a form of business funding which releases cash out of a business’ unpaid sales ledger. A lender could advance you up to 90% of the value of your unpaid invoices, with the cash made available to you, usually within 24 hours.
This facility improves your cashflow whilst you manage your own sales ledger – chasing customers and collecting payments for invoices.
Factoring vs. Invoice Discounting
Both facilities are similar in that the lender advances an agreed percentage of the invoice value – typically 80-90% of your sales ledger. Invoice discounting operates as a funding line, giving you control over your sales ledger and the responsibility of overseeing all credit management and payment collection. With factoring, this role is allocated to the factoring provider.
Factoring is usually a disclosed facility, suitable for businesses with lower levels of turnover (say £50,000) – start-ups inclusive. On the other hand, Invoice Discounting is a confidential facility, suitable for established businesses (been trading for 2 years and above) with larger levels of turnover (say £350,000 and above), as they often have in-house credit control systems and proof of trading history.
Invoice Discounting: How it works?
Invoice discounting operates in the following way:
- Invoice your customers for good(s) and/or service(s) provided and send a copy of the invoice to the invoice discounter.
- The lender would then make available to you a pre-arranged percentage of the total unpaid sales ledger – typically about 80-90% of the invoice.
- You handle all aspects of credit control, including chasing customers and collecting payments
- Your customer settles the full value of their invoice.
- The invoice discounter then makes available the remaining balance (10-20% of the invoice), less any charges.
Invoice Discounting: Are you eligible?
Invoice discounting is a flexible and structured form of commercial finance that opens the door of opportunity for firms looking to secure finance. It is suitable for your business if:
- You have an annual turnover of £350,000 and above. Could vary depending on the lender.
- You issue credit terms of 30 – 90 days
- You trade with other businesses
Invoice Discounting: What are its benefits?
- Upfront payment of up to 90% of outstanding funds could be released within 24 hours. This improves your cashflow and gets your business going in the short-run.
- Control over your sales ledger and debtor collection
- The funds released improve your bargaining power with your suppliers – take advantage of early supplier discounts.
- Increased working capital which enables you to cover all your day-to-day overheads. Could be used as part of a financing package to facilitate a management buy-out or buy-in.
- Flexible facility as the growth is dependent on your sales volume – grows in line with your business. Suitable financing option for seasonal or growing businesses.
- The facility could be administered confidentially whereby your customers are unaware of the lender’s involvement.
- Fewer conditional requirements compared to other forms of finance as the cash is secured against future payment of invoices. Typically, the funding is based on the quality of your customers, not your credit rating.
- Some invoice discounters provide bad debt protection which acts as an insurance against customer defaults.
Invoice Discounting: How do I access it?
Invoice discounting is best offered by a commercial finance broker such as Touch Financial (Asset Based Finance Broker of the year 2011). Touch works with over 20 of the UK’s leading lenders and would put you in touch with the most suitable lenders that can help fuel growth into your business.
This business advice article is from Touch Financial, the UK’s largest invoice finance broker.