What is invoice discounting?
Small business invoice discounting explained: how it works, who it’s for, and how you can find a lender
Invoice discounting is a variation on factoring where the lender still advances money on a business’ invoice but, instead of the lender collecting the debts for the business, the business collects its own debts.
How does invoice discounting work?
Step 1: You raise and submit the invoice, and send a copy to the invoice discounter. Step 2: The lender then pays you a percentage advance of the total value of the invoice. This value is usually around 80-90% of the invoice but depends on what is offered to you by the lender and what advance you want to take. Step 3: You then chase and collect the money your customer owes you, before depositing it into a client account with the discounting company. Step 4: Finally, the invoice discounter pays you the remaining balance of the invoice (the 10-20%), less a small fee for the borrowing charges.
What are the pros and cons of invoice discounting versus factoring?
One advantage of invoice discounting is that the advance can be higher than factoring with a smaller fee for borrowing. However, there is usually still a monthly fixed charge on the percentage of your turnover for processing, which means if you stop using the facility you will still be paying the monthly charge. Some businesses also prefer invoice discounting over factoring as the process can be kept confidential, so none of your customers need know that you are borrowing in this way. This allows you to be even more flexible in offering credit to your customers without impacting on your client relationships, as no third party is involved in negotiations. It does, however, mean that you have to pay a fee without handing over any of the responsibility for your debt collection.
What type of companies are eligible for invoice discounting?
The idea behind invoice finance products is that they can be tailored to the majority of business situations and needs. Lenders will generally consider your business if you:
- Provide sales on credit to your customers
- Have an annual revenue of £250,000 or more
If your turnover is not this high don’t worry, as your case should still be looked at, but it is possible that other types of invoice finance solutions will be offered to you as they may be more appropriate for your situation. These products could include factoring or single invoice finance (also known as spot factoring). Common users of invoice discounting include recruitment companies, businesses that outsource manufacturing or distributors, or other service providers that work on the basis of a fee payable on completion of a project. Ineligible companies include shops, which typically take payment at the point of sale.
How can I find a small business invoice finance lender?
The Asset Based Finance Association (ABFA) can easily point companies in the right direction . It’s a product most banks actively offer and there are a whole variety of specialist invoice finance lenders and introducers, such as accountancy firms that have good relationships with particular lenders. Another option is to use an invoice finance broker as opposed to choosing a particular lender. A broker will be able to provide you with a wider variety of specialist services and should be able to present a number of options to suit your individual needs. Startups.co.uk has partnered with Touch Financial so that if you are looking to release cash from your invoices you can request a quote from one of the 20 leading lenders in the UK here. Click here for an online invoice discounting quote