Disclosed invoice discounting is where a lender will ensure that the disclosed clause is enforced, this means that it will be necessary to mark invoices as ‘assigned to an invoice provider.
Invoice Discounting in a type of invoice finance that provides a business with enough cash to fund its working capital requirements.
This type of finance enables a business to raise cash against your business to business invoices, without having to wait weeks or months for payment improved working capital.
What is a disclosed invoice discounting facility?
A disclosed invoice discounting facility is one where the finance provider will disclose to the customer about their involvement by clearly marking invoices to be paid directly to the lender and not the customer.
The invoices sent to the customer must be marked ‘assigned to an invoice provider’, and rather than making a payment into a third party client bank account, the customer has to pay the discounter directly.
Disclosed facilities are better suited to businesses that are looking for further support managing their sales ledger as we will provide a designated credit controller who will send out monthly statements and make telephone contact with their customers.
- Most businesses do not qualify for confidential discounting facility because their turnover is simply not high enough, they do not hold enough net assets or their collections department is not efficient enough. In these instances they have the option of ‘disclosed invoice discounting’.
- Disclosed invoice discounting is often know as ‘ D I D’.
- Disclosed invoice discounting is similar to normal confidential invoice discounting BUT the main difference is that customers have to pay the invoice finance company direct.
- Under a disclosed invoice discounting arrangement submitted invoices would have a note on them saying that the “invoice has been assigned to a discounting lender”.
- An invoice discounting facility is usually double the cost of confidential invoice discounting facilities because there is more administration staff involved in the process.
How does disclosed invoice discounting work?
Disclosed invoice discounting works by selling control of your accounts receivable, either in part or in full. It works like this:
You provide goods or services to your customers in the normal way.
You invoice your customers for those goods or services.
You “sell” the raised invoices to a factoring company. The discounting company pays you the bulk of the invoiced amount immediately, typically up to 80-90% of the value, after verifying that the invoices are valid.
Your customers pay the factoring company directly. The discounting company chases invoice payment if necessary.
The discounting company pays you the remaining invoice amount – minus their fee – once they’ve been paid in full.
When should disclosed invoice discounting be used?
Disclosed invoice discounting should be used when you routinely have a lot of invoices outstanding and your cash flow is suffering because of it.
As an example, say your organisation sells on 30-day payment terms. Most of your debtors will pay within 30 days, but some may require chasing. Others may go over your agreed payment terms and require more persistent effort on your part.
That 30-day chunk of revenue might represent the bulk of your potential cash flow, but you can’t actually use it. Invoice factoring allows you to release that cash almost immediately, or at least a large part of it. You could use that money to:
- Bridge short-term expenses
- Repay a loan
- Take advantage of seasonal business opportunities
- Any reason for which cash flow might otherwise be a constraint
Disclosed Invoice Discounting Advantages and Disadvantages
|1||Get Fast Cash||Decreased profit|
|2||Release Cash that has been Locked in Invoices||Industry sentiment|
|3||Faster way to take short term finance||Offered on only commercial invoices.|
|4||Better way for unsecured business loan||Volatile|
|5||Help in Quick Financial growth||Can upset some customers|
Benefits of disclosed invoice discounting
The improved cash-flow disclosed invoice discounting can provide a business to take advantage of opportunities to grow, pay the expenses associated with an increase in demand and bridge the cash-flow gaps associated with late customer payments. It also allows businesses to buy more competitively from their suppliers by taking advantage of early payment discounts.
Another benefit is that the amount of finance you can raise increases as your business grows, often giving you access to more funds than a business loan or overdraft. There’s also no debt created, which means no business or personal assets are required as security other than the invoice itself.
Not all invoice finance providers offer a disclosed invoice discounting, so shop around, compare fees and ask for recommendations from personal contacts to find the right deal for your business.
Disadvantages of disclosed invoice discounting
Unsuitable for businesses with few customers – Disclosed invoice discounting isn’t suitable for companies with only a handful of main customers. Discounting companies prefer to spread their risk as widely as possible. They try to avoid a high concentration of invoices to just a few customers.
Requires a big commitment – Although it’s sometimes possible to fund a small number of invoices (This is known as selective factoring or spot factoring), most discounting companies will want to take over the bulk of your accounts receivable. They may also try to tie you into a long contract, which could be two years or more. This is necessary from their perspective, but it means you can’t just dip in and out of disclosed invoice discounting at any time. It’s a major business decision.
Costs more if your customers are risky – Discounting companies do their best to accurately determine the risk of late payment or non-payment of debt. This means they will assess your customers carefully. Their fees will reflect their perception of credit risk – if you or your customers are deemed high risk, fees will be high.
Extra costs when it doesn’t work – There may be extra disbursements to pay if your clients turn out to be worse payers than expected. If a customer fails to pay, you may have to repay the amount the discounting firm has already paid you, unless you pay extra for non-recourse discounting. In short, don’t expect a discounter company to take over your bad debts for nothing.
Can harm your relationships with customers – When you fund disclosed invoices, the credit control is handled by the discounting company, you are handing over some of the control over your customer relationships too. If the discounter pursues the debt in a cold or aggressive manner, you risk your customers being put off working with you in future.
What is disclosed invoice discounting and how does it work?
Disclosed invoice discounting is where a lender informs your client of their involvement of providing third party finance, it works in a similar way to factoring, as the businesses invoices will show disclosure of purchase by the discounter.
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.