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Invoice Discounting

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Invoice discounting explained

What is invoice discounting?

Invoice discounting is a type of commercial finance facility that utilises a company’s outstanding invoices as collateral for a cash advance, or loan.

How does invoice discounting work?

As new invoices are raised by the borrowing business, the invoice discounting provider releases a percentage of the value of the invoice straight away. This allows you to avoid having to wait for your agreed payment terms to be met.

With invoice discounting, you remain responsible for the chasing the debt and ensuring it’s paid.

Once the invoice is settled, the lender is repaid, as well as any interest and fees, with the borrower receiving the balance.

Why do companies take out invoice discounting?

These facilities are used to help the cash flow of businesses who have agreed to delayed payment terms, but want to improve their cash flow by receiving a proportion of each invoice immediately.

As you maintain control of your own sales ledger, invoice discounting is a confidential service, meaning your customers will not know that you’re using it. This is in contrast to invoice factoring, which passes on responsibility for collecting payment to your invoice finance provider.

By maintaining your own credit control process, it allows you to maintain control over the process and the relationship between your business and its customers.

Who can invoice discounting be used by?

There are several industries that tend to benefit greatly and the most common are:PrintingSecurity firmsManufacturingEngineeringRecruitmentWholesaleTransportLogisticsConstructionFreight

Of course, any company supplying on payment terms of 30 days or more can benefit, regardless of industry.

Invoice discounting is usually more appropriate for businesses with a turnover of £250,000 or more, with invoice factoring usually more beneficial for smaller companies.

How much can I borrow?

How much of each invoice can be released?

In theory, you can release up to 100% of your invoice, although 80-90% is more common. Of course, once the invoice is settled, you’ll still receive the balance, minus any fees and interest.

As an example, if we were able to fund 90%, and you issued a £10,000 invoice, you could receive £9,000 within 24 hours.

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.

Costs of invoice discounting

These facilities are made up of two main charges, they are the following:

Service fee

The service fee is usually an agreed percentage of your turnover and is designed to cover the lenders cost of managing the facility.

Discount fee

This fee is effectively your interest and is charged based on the amount of funds drawn down at any one time. This provides you with an opportunity to save money when your invoices are settled early, making your credit control processes all important.

Where to get an invoice discounting facility

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 invoice 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.

Invoice finance 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.

How to get your application approved

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 formA list of your customersSales/debtor ledgerDetails of any outstanding invoicesFinancial 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 on credit terms and has a turnover of £100,000+ there is a good chance that you’ll qualify for cash flow finance.


Should I take out invoice discounting?

This depends on your circumstances, however, if your business is issuing invoices on delayed payment terms and would benefit from improved cash flow, then you should consider it.

Cash flow is one of the most important elements of running a business and an opportunity to improve it should always be explored. That said, you should always consider this alongside the costs – and whether the benefits outweigh them.

Is invoice discounting risky?

The main risk associated with invoice discounting is that you drawdown funds and your customers fail to pay. This can be offset by taking on bad debt protection, which is an addon service that’s offered by several lenders, but obviously comes with added costs.

Is invoice discounting regulated?

The invoice finance market isn’t currently regulated by the Financial Conduct Authority (FCA). This is in line with most other types of business finance.

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