Invoice discounting is a type of finance that allows businesses to obtain immediate cash by selling their accounts receivable to a third-party lender at a discount. But it also has its drawbacks.

In this article, we will explore the advantages of invoice discounting, including how it can improve cash flow, provide quick access to funds, and be relatively easy to qualify for. We will then examine the potential drawbacks of invoice discounting, including its cost, the potential damage it can do to customer relationships, and the requirement for creditworthy customers.

Our goal is to help you feel informed to obtain the best finance for your business growth.

Increased Cash FlowSmaller Companies may Find it Difficult to Obtain Credit
Speeds up the Working Capital CycleHigher cost
No Need to Inform ClientsIt is Possible to Become Reliant on Invoice Discounting
Business Retains ControlMay Hamper Finding Additional Business Finance
Only pay Interest on the Money that you Borrow
Facilitates the Earlier Paying of Suppliers
Bad Debt Protection Offers
Better Working Capital Means you can Expand

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What are the Advantages of Invoice Discounting?

Increased Cash Flow

Invoice discounting providers generally work much faster than banks in assessing the viability of the lender. Many lenders are able to generate cash in as little as 48 hours meaning discounting has significant speed advantages over traditional finance.

Speeds up the Working Capital Cycle

With discounting, cash that has been locked in unpaid invoices can be freed up quickly the liquid cash to keep the cogs of the business whirring.

It can be particularly useful for businesses with a smaller number of clients who pay larger value invoices – in these cases the late payment of a single customer invoice can pose risk to the overall health of the company.

No Need to Inform Clients

Unlike invoice factoring, invoice discounting does not necessitate alerting clients to the fact you’re using an invoice finance provider.

Many businesses are concerned that disclosing the need for invoice finance may rock confidence in the brand.

Business Retains Control

With discounting, it is the business that retains control over the sales ledger. Continuing to collect payments and chase invoices, this type of finance does not alter the relationship between the business and the customer anyway.

Only pay Interest on the Money that you Borrow

Factoring, by comparison, often imposes a stricter interest on money borrowed. For many businesses, invoice discounting offers a cost-saving over other forms of invoice finance.

Facilitates the Earlier Paying of Suppliers

Since many businesses are hampered by restricted cash flow and paying their own supplies late, invoice discounting makes it easier to pay suppliers faster and possibly to negotiate early payment discounts as a result

Bad Debt Protection Offers

As this industry grows more competitive some invoice discounting lenders are now offering bad debt protection free for limited period of time. This offers protection if the customer becomes insolvent.

Better Working Capital Means you can Expand

Many businesses use invoice discounting strategically to increase working capital so the company can fuel its growth.

What are the Disadvantages of Invoice Discounting?

Smaller Companies may Find it Difficult to Obtain Credit

invoice discounting is generally an option for businesses with a substantial turnover, so one of the disadvantages of this form of finance is that smaller enterprises may find it difficult to find lenders willing to accept them.

Usually, there are some fairly strict ground rules, and the company must be able to demonstrate an established track record. Whilst there are lenders now springing up to fill this gap, some of these may charge a higher fee as a result.

Higher cost

Because it is a short-term loan, invoice discounting usually comes with high costs and higher fees than traditional bank loans or overdrafts.

It is Possible to Become Reliant on Invoice Discounting

Whilst the goal of invoice discounting is always to manage cash flow strategically and with the overall success of the business in mind, it is also possible for businesses to become trapped in a debt cycle, unable to operate without the existence of monthly cash flow arrangements

May Hamper Finding Additional Business Finance

Since certain forms of business finance utilise accounts receivables as part of the loan collateral, the existence of an invoice discounting arrangement (in which the invoice becomes an asset of the finance company rather than yourself), maybe preclude gaining additional finance.