Invoice discounting is a form of invoice financing, which enables you to raise cash on your unpaid invoices. Invoice discounting companies use your unpaid invoices as collateral, and lend you a percentage of their value as soon as they are raised. They therefore provide a valuable service to many types of business, including manufacturers, wholesalers and those with a high staff turnover, such as recruitment firms.
The reason why this service is so valuable is that very few businesses can rely on prompt payment of the invoices they issue -- in fact some customers can take months to settle their bills. This can result in serious cash flow problems, and can mean you have insufficient working capital to pay wages or purchase new stock. This can be even more difficult at times when banks are reluctant to lend.
You can usually be accepted for an invoice financing arrangement if your company is in good standing, and has an annual turnover of £500,000 or more. The provider, or discounter as the companies are called, will collect the details of your invoices regularly, and pay you a percentage of the total value -- usually up to 90%. When the customer pays the bill, you put this payment into your account with the discounter, who will then release to you the balance of the invoice, minus the service fee.
The difference between the two forms of invoice financing, discounting and factoring, is that with factoring, the provider will chase up the unpaid bills, whereas with discounting it is your responsibility. Factoring can be useful as it frees you up from having to pursue bad debts, but it makes it clear to your clients that you are in a finance arrangement. Discounting ensures complete confidentiality.
One big advantage of invoice discounting is that while you pay a fixed service fee, the discounter only charges interest on advances which remain unpaid by the customer. When customers' bills are settled, your debt is paid, so you have a flexible line of credit which grows along with your business. This frees you from the continual problems of having to extend your overdraft, or keep re-applying for loans.
Most businesses need financial help at some time, especially when bank lending is hard to come by. Invoice discounting companies can often be the answer. However, not all lenders are the same, and it is important to take the trouble to find the right lender, who can understand the needs of your business.