In this article we will inform you, what is Invoice discounting, how does it help to small businesses, comparison of discounting and factoring.
Well, Invoice Discount 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 (lender)
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.
Invoice Discounting v/s Factoring
- The advance can be higher than factoring with a smaller fee for borrowing in invoice discounting.
- Invoice discounting is usually used by companies that are larger than those that use factoring.
- Invoice discounting helps you keep control and confidentiality over your own sales ledger operations
- Whole invoice discounting and selective invoice discounting products are usually available, however many of the traditional factors don’t allow business to get finance against their entire sales ledger, despite the fact that fees are charged against the entire turnover of the business.
- The credit control function in a factoring facility is outsourced, thus the client has little control over their sales ledger.
- The factoring facility is disclosed i.e. your customer will know that you are using a factoring facility.
Who are Eligible for Invoice Discounting?
The idea behind invoice finance products is that we can tailor 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 £150,000 or more
If the turnover is not much high not to 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
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.
Another option is to use an invoice finance broker like Biz Money 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.