Invoice Discounting

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Gary Hemming

Author: Gary Hemming CeMAP CeFA CeFA CSP

20+ years experience in invoice finance

Invoice discounting allows you to raise finance against your existing invoice book. It is a confidential form of invoice finance and allows you to raise funds quickly to fund the day to day finance requirements of your business, or even business growth.

In this guide, we break down what it is, how it works, the pros and cons, who can qualify for it and how to make sure your application is approved.

What is Invoice Discounting?

In the bustling world of business banking, invoice discounting is a term that’s been gaining significant traction. But what exactly is it? Simply put, invoice discounting is a form of asset-based lending that allows businesses to leverage their unpaid invoices to secure immediate liquidity.

It’s a financial planning tool that’s become a cornerstone for many businesses, particularly in the manufacturing and recruitment sectors, where cash flow is king.

Unlike business loans or equity financing options, discounting invoices is tied to your sales ledger, providing a flexible form of borrowing that grows with your business.

It’s sometimes called confidential invoice discounting, as it allows businesses to manage their own credit control processes, keeping the arrangement under wraps from each client.

How does Invoice Discounting work?

Now that we’ve got the definition down, let’s delve into the mechanics of discounting. It’s a process that’s as straightforward as it is effective at providing finance for working capital.

When you raise an invoice for a customer, a percentage of its value (often up to 90%) can be immediately released by the finance company.

This provides an immediate injection of cash into your business, reducing the waiting time for customers to pay and improving your cash flow significantly.

Once your customer pays the invoice, the remaining balance, minus any fees, is paid to you. It’s a simple yet powerful way to keep your cash flow healthy and your business running smoothly.

It’s worth noting that with invoice discounting, the responsibility for chasing payment remains with you, maintaining the confidentiality of the arrangement.

As such, it’s important that you have robust credit control procedures in place to manage the payments coming in.

What our expert says…

“Invoice finance is a key tool for any business owner who operates on delayed payment terms. For these businesses, cash flow management is a key issue and the more successful you are, the tighter cash flow becomes.

As an industry, we haven’t always made it easy to access funding without being bombarded with phone calls, and this is something that we wanted to change.”

Gary Hemming

Author: Gary Hemming CeMAP CeFA CeFA CSP

20+ years experience in invoice finance

What are the advantages?

It can be a game-changer for businesses looking to improve their cash flow and fuel growth. Here are some of the key advantages:

Improved Cash Flow

By releasing up to 90% of the invoice value immediately, invoice discounting significantly improves your cash flow. This can be a lifeline for businesses waiting for customers to pay their invoices.

Confidentiality

Sometimes called confidential invoice discounting, this method allows businesses to maintain their own credit control processes. This means your customers are unaware of the financing arrangement, helping you to maintain strong customer relationships.

Flexibility

Unlike traditional business loans, invoice discounting is tied to your sales ledger, meaning the amount you can borrow grows with your business. This makes it a flexible financing option that can adapt to your changing needs.

Control

With these facilities, you maintain control over your sales ledger and credit control processes. This can be beneficial for businesses with strong credit control teams.

What are the disadvantages?

While it offers numerous benefits, it’s important to be aware of the potential disadvantages:

Costs

There are fees associated with invoice discounting, including a service fee and a discount fee. These costs need to be weighed against the benefits to ensure invoice discounting is a cost-effective solution for your business.

Credit Control

It requires businesses to manage their own credit control processes. This can be a disadvantage for businesses without the resources to effectively chase payments.

Eligibility

It is typically suited to businesses with a high turnover and strong credit control processes. Smaller businesses or those with less robust credit control may find it harder to qualify.

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Is using an Invoice Discounting company a good idea?

It can be a fantastic tool for businesses looking to boost their cash flow and seize growth opportunities. It’s particularly beneficial for businesses with long payment terms or those experiencing rapid growth.

By providing immediate access to cash tied up in unpaid invoices, it can help businesses overcome cash flow challenges and achieve their financial goals.

However, like any financial decision, it’s important to consider all the factors. The costs, the need for robust credit control processes, and the impact on your customers are all important considerations.

It’s always a good idea to seek expert financial advice to ensure invoice discounting is the right choice for your business.

What are the benefits of this type of Finance?

Invoice discounting offers a wealth of benefits that make it a popular choice for businesses across the UK. Firstly, it provides immediate access to cash tied up in unpaid invoices, improving liquidity and enabling businesses to seize growth opportunities without waiting for customers to pay. This can make a business much more cash flow positive, and reduce the risk associated with growth.

Secondly, because it’s based on your sales ledger, it’s a form of finance that grows with your business. The more you payments you invoice, the more funding you can access. This makes it a flexible and scalable solution, particularly suited to businesses with strong sales growth on delayed payment terms.

Thirdly, it allows businesses to maintain control over their credit control processes. This means you can continue to manage your own customer relationships, without the involvement of a third party.

How is the amount I can borrow decided?

The amount you’re able to release is decided based on the financial strength of your business, how effective your credit control process is and the financial strength of your customers.

Ultimately, lenders will release higher percentages of each invoice if they’re confident that they’ll be repaid without issue.

Are there any other restrictions?

Yes, if you have a mixed profile of customers, you may find that you’re able to borrow less for those with the least creditworthiness. In some cases, particularly weak customers could be excluded altogether.

It’s important that you consider the bigger picture when looking to maximise borrowing, rather than looking at just the headline figures.

Where to get an invoice discounting facility

The question of where to get a facility is a key step in finding the best deal. Find out how to approach this side of funding your invoice book.

Approaching a lender directly

It’s usually possible to work directly with a lender, should this be your preference. The main lenders tend to be high street banks, challenger banks, specialist discounting finance providers and even peer to peer platforms.

The main drawback to working directly with a lender is that it can be hard to get a strong overview of each lenders pricing online. As such, it’s often difficult to find the best deal without approaching many lenders – which is obviously time consuming.

Should I use a broker?

A broker’s job is to help you secure the best deal for your circumstances. What that is will depend on whether your key driver is the speed of the application process, the amount released, the fees and charges – or a combination of all three.

The invoice finance industry is fairly small and tends to be very interconnected, meaning a broker may be able to leverage relationships to your benefit. Of course, not all brokers are actually good, or well connected, so that’s not to say that every broker will be beneficial to your application.

Brokers don’t usually charge any fees for their service, instead taking a commission from the lender. This means that you want pay any additional fees or charges should you choose to work with a broker.

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How to get your application approved

There are a few key steps to getting your application approved. They are providing the correct supporting information upfront, allowing enough time for things to complete and answering questions quickly and efficiently. We explore these in further detail below.

What documents will I have to provide?

Each lender will set requirements based on your circumstances, but the following are almost always required for every new application:

  • A fully completed application form
  • A list of your customers
  • Sales/debtor ledger
  • Details of any outstanding invoices
  • Financial records for your business (accounts and bank statements)

How long does it take to get my facility set up?

Of course, this depends on your business, but it’s generally a good idea to allow 2-3 weeks for the application process and for the facility to be set up.

How can I speed up the process?

Being proactive is key to speeding up the application process. Sending back documents and answering questions clearly will ensure that the process runs as quickly and smoothly as possible.

On top of speeding up the process, it can also improve the relationship with the lender and may even result in a better deal if they’re keen to secure your business.

Will I qualify?

If your business is selling to other businesses through invoice on credit terms and has a turnover of £100,000+ there is a good chance that you’ll qualify for this type of finance.

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Who is Discounting for?

Invoice discounting is a versatile financial tool that can benefit a wide range of businesses. It’s particularly well-suited to businesses with a strong credit control team, as they’ll be responsible for chasing payment.

Businesses in sectors with long payment terms, such as manufacturing and recruitment, can also benefit significantly from invoice discounting. It provides the cash flow support needed to bridge the gap between raising an invoice and receiving payment.

Finally, businesses looking for a flexible form of finance that grows with their sales will find invoice discounting a compelling option. Whether you’re a small business looking for financial support to fuel growth, or a larger company seeking to improve cash flow and liquidity, discounting could be the right choice for you.

How much does it cost?

When it comes to the costs of invoice discounting, it’s important to remember that it’s not a one-size-fits-all scenario for working capital. The cost can vary depending on a number of factors including the size of your sales ledger, the creditworthiness of your customers, and the terms of the agreement with your provider.

Typically, there are two main fees associated with invoice discounting. The first is the service fee, which covers the cost of managing the account. This is usually a percentage of your turnover. The second is the discount fee, which is similar to interest on a loan and is charged on the amount advanced to you.

While these costs can be a consideration, it’s essential to weigh them against the benefits that it can bring to your business. The improved cash flow, the ability to seize growth opportunities, and the flexibility to manage your own credit control processes can often outweigh the costs involved.

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How to apply

Applying is a straightforward process, but it’s important to be prepared. Here’s a step-by-step guide to help you navigate the application process:

  1. Assess Your Eligibility: Invoice discounting is typically suited to businesses with a strong credit control team and a high turnover. It’s also important that your customers have a good credit report.
  2. Prepare Your Financial Statements: Lenders will want to see your financial statements, including your accounts, sales ledger and details of your credit control processes and maybe even statements from your business bank accounts.
  3. Choose a Provider: There are many providers of discounting your invoice book, from high-street banks like Lloyds Bank and HSBC, to specialist lenders. It’s important to choose a provider that understands your business and can offer a flexible solution that meets your needs.
  4. Submit Your Application: Once you’ve chosen a provider, you’ll need to submit your application. This will usually involve providing information about your business and your customers, as well as your financial statements.
  5. Wait for Approval: Once you’ve submitted your application, the lender will assess your eligibility and make a decision. If approved, you can start accessing funds as soon as you raise an invoice.

Why choose ABC Finance for Invoice Discounting?

When it comes to invoice discounting, ABC Finance stands head and shoulders above the rest. We understand that every business is unique, and we pride ourselves on offering flexible, tailored solutions that meet your specific needs.

Our team of experts have years of experience in financial services and are committed to providing the best financial advice. We offer a transparent pricing structure with no hidden fees, ensuring you know exactly what you’re paying for.

But what truly sets us apart is our commitment to our clients. We believe in building strong, long-term partnerships, and we’re there for you every step of the way, from the initial application to managing your account.

Invoice Discounting vs Invoice Factoring

Discounting and invoice factoring are both effective ways to improve cash flow, but they work in slightly different ways and are suited to different types of businesses.

Invoice factoring involves selling your unpaid invoices to a factoring company. The factoring company takes over the responsibility of collecting payment from your customers, which can be a benefit if you don’t have the resources to manage your own credit control. However, it does mean that your customers will be aware of the arrangement.

On the other hand, invoice discounting allows you to maintain control over your credit control processes. It’s a confidential arrangement, meaning your customers are unaware of the financing in place. This can be beneficial for businesses that value the direct relationship with their customers.

Both options provide immediate access to cash tied up in unpaid invoices, but the choice between the two will depend on your business’s specific needs and circumstances. It’s always a good idea to seek expert financial advice to ensure you’re making the right decision for your business.

In conclusion, whether it’s invoice discounting or invoice factoring, the goal is the same: to boost your cash flow and provide the financial support your business needs to thrive. And with the right partner by your side, you can navigate the world of finance with confidence and ease.

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