Is invoice discounting the right option to deal with late payers?

I run a medium-sized event management company that organises events for a number of prestigious blue chip clients. However, many of our clients are slow to pay their invoices and this is having a major impact on our cashflow. A number of my business peers have suggested I use invoice discounting, but I don’t know where to start. Can you help?

A. Mike Harrison of Enterprise Finance Europe writes:

You’ll be pleased to know you’re not alone. The answer for companies such as yours, who sell on credit, lies increasingly in invoice discounting. It offers greater financial headroom and in turn greater financial flexibility to help meet the costs of developing your company. It also goes some way to ensuring you maintain a healthy cashflow.

In a nutshell, invoice discounting enables you to release funds against unpaid sales invoices, so that you can draw down up to 90% of the invoice value (higher in certain circumstances) electronically within 24 hours of the invoice being raised. The outstanding 10%, minus an agreed service fee, is released when the client settles the outstanding invoices.

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Plus, a good invoice discounting company will help support your credit control function as well as provide a credit vetting facility so you can make informed choices about taking on a new customer or extending credit to an existing one.

Businesses like yours are becoming increasingly wise to the many fi nancial alternatives that exist in the marketplace and it is little wonder that invoice discounting is now widely viewed as a smarter option than an overdraft. As well as removing the aforementioned hassle of chasing debt, it brings in cash to the company sooner than waiting for standard credit terms, better equipping you to meet the peaks and troughs that come with running any business.

This is just one aspect of what invoice discounting can do for your business, though. Its inherent flexibility, in so far as it enables working capital to grow in line with sales (it is normally the reverse), means it is becoming much more of a feature of other areas of business. For instance, it is now estimated that up to 40% of all management buy-outs are being completed with invoice discounting as a part of the overall funding package. It is little wonder that invoice discounting is one of the fastest growing forms of funding in the UK at this time.

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  1. Factoring can be a treadmill that once you’re on it, its difficult to get off. An alternative to paying interest to borrow money against invoices is to collect them on time in the first place. This is easy to say and difficult to do. Most small businesses prefer to spend their time securing new business rather than making those difficult calls to customers who haven’t paid their bills and a full time credit controller is probably not appropriate until your turnover is over £3m.