Invoice Discounting
What is Invoice Discounting
Invoice discounting is different to factoring in that the company involved is
loaned an agreed percentage of its total debtor book rather than a percentage of
each customer invoice. It is like a flexible overdraft that is directly linked to
the sales ledger. It provides a cost-effective way for profitable businesses to improve their cashflow.
Another key advantage for a company is that invoice discounting allows them to
chase and deal with their own customers.
Invoice discounting helps them because it let them chase their own debts and have
their own targets on debt collection. If for example there is a query on postage,
the specific item in question gets dealt with as opposed to entire invoice. The
bank's only involvement is to check that their systems are in place to do job.
Invoice discounting is only available to businesses that sell products or services on credit to other
businesses. It is normally only available to businesses with a proven track record and an annual turnover of
at least £500,000.
It may not necessarily be the cheapest form of finance and can tie you into a long contract.
How Invoice Discounting Works
The invoice discounter will first check the business, its systems and its customers. It may then agree to advance
a certain percentage of the total outstanding sales ledger.
You will pay a monthly fee to the invoice discounter and also pay interest on the net amount advanced. This is in
addition to advances received or money repaid.
Each month, more money is advanced by the discounter or repaid by you. This will depend on whether the total amount
owing has gone up or down.
For example, if the invoice discounter agrees to advance 80% of the total owing and the total of outstanding invoices
is steadily changing, then so will the amount you receive. If the outstanding debt drops month on month, you must
repay 80% of the fall in debt. If the debt rises month on month, you will receive 80% of the increase.
Features of Invoice Discounting
- You collect the debts and do the credit control. See Debt Collection Guidance.
- Your customers do not usually know about the invoice discounting, although it is sometimes disclosed.
- Annual turnover must usually be at least £500,000, although increasingly smaller businesses will be accepted. Generally,
discounters will review the credit history and profit track record of your business. They will have stringent requirements
regarding the quality of sales ledger systems and procedures.
- The invoice discounter will check regularly to see that your procedures are effective.
- You can choose between recourse and non-recourse facilities, determining who is responsible for recouping unpaid
invoices. See recourse factoring and non-recourse factoring.
But invoice discounting is not the only type of finance a company has at its disposal, to improve
cashflow problems.
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