What is Invoice Discounting?

If your cash flow is slow, do something about it...

What is invoice discounting and how does it work? Invoice Discounting provides a cash flow solution for business.

How does invoice discounting work?

The invoice discounting company (discounter or invoice discounter) will buy the trade debts (also known as accounts receivables, or your sales ledger) of the business at an agreed funding rate.

Discounters typically advance 80% to 85% of the face value of valid invoices, for example ...

A company raises new sales invoices of £100,000. Based on the 85% advance it would generate a cash injection of £85,000. This releases working capital that would otherwise be "locked up" and provides immediate cash flow enabling you to pay creditors and use that cash for expansion and growth.

The discounter will then continue to provide you with up to 85% of the value of new sales invoices, normally within 24 hours of you raising them. The other 15% of the value of your sales invoices is passed onto you (minus fees) when the customer pays.

There are some circumstances where overpayments can be arranged, however this type of advance will be determined on the basis of how the facility has been maintained and if a successful and trustworthy transactional history has been built up.

Once the facility is in place, there is no limit to the amount you can borrow as the level of finance is directly linked to the level of sales. So as your business grows so does the amount of funding available to you. This is in sharp contrast to bank overdrafts, which require regular re-negotiation and arrangement fees.

What are the criteria for invoice discounting?

Invoice discounting facilities are normally made available to established businesses with turnovers in excess of £250,000.00 which have good systems in place to ensure reliable collections from their customers.

How does invoice discounting differ from factoring?

The fundamental difference between invoice discounting and factoring is that you are responsible for the collection of cash from your debtors. The payments that you receive are paid into a nominee bank account which is administered by the invoice discounter.

Where a Confidential Invoice Discounting facility (CID) is in place your customers are unaware that a discounter is funding your business.

For any business the potential for bad debt will always be an issue. If you are concerned about bad debts, many discounting companies can provide a facility that will include bad debt insurance protection for additional security.

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You may also find our business finance glossary of terms useful.