Invoice discounting (often referred to simply as ‘discreet invoicing’) is an alternative form of business finance in which business owners sell their unpaid invoices (accounts receivable) to a third party. Businesses, therefore, gain access to all the money in advance (minus the lender’s fee), thereby injecting their business with much-needed cash flow. It’s an increasingly popular means of improving the Working Capital Cycle (WCC), especially since the tightening of conventional funding from banks (loans and overdrafts) since the Credit Crunch.

Another way of understanding invoice discounting would be a series of ongoing short-term business loans where invoices are used as security. The lending risk is limited since:

(a)  Only a percentage of loans can be discounted, meaning there’s always a safety buffer.

(b)  The lender knows that the invoice has already been issued so, assuming there’s no history of late payment, it stands a high chance of receiving full payment.

invoice discounting explainedAdvantages of Invoice Discounting

  • Accelerates cash Flow, since you don’t have to wait for your customers to pay
  • It’s available to companies who may have been refused traditional bank finance due to poor credit
  • It is usually arranged confidentially, so you won’t risk potentially uncomfortable conversations with customers

What are the Costs Involved with Invoice Discounting?

You should expect interest of 1.5% to 3.0% above bank base rates plus a management fee of between 0.2% and 0.5% of turnover. You should also check if there are termination costs in the contract or other hidden fees.

What is Invoice Discounting ‘with Recourse’?

This is a common term and condition added to many Invoice Discounting contracts which assets the lenders right to be paid their fee, even if the customer defaults on their invoice. It means, essentially, that you (your company) remain liable for debts.

What’s the Process?

Every month, the business borrowing the money sends accounts receivable report to their invoice discounting provider. They then use this data to adjust the amount of debt they are willing to loan.

The borrower remains responsible for issuing and collecting invoices to its customers in the normal fashion.

What kind of companies are best suited to Invoice Finance?

  • Businesses with a higher profit margin are likely better suited to Invoice Discounting, simply because this makes them more able to handle the higher interest rates.
  • You should have robust credit control systems in place
  • You should have little or no history of customers disputing invoices or paying them late

How is Invoice Discounting different to Invoice Factoring?

Invoice discounting differs from factoring in that the company itself retains full control of its credit management. With invoice factoring, the lender themselves becomes responsible for collecting invoices, as a means of adding a further level of security.

What is ‘disclosed’ invoice discounting (DID)?

For a lender to allow a company to borrow money confidentially, their turnover must be significant, since this is a form of security for the lender. Where companies don’t meet the turnover requirements but still wish to utilise invoice discounting, however, a ‘disclosed’ option is sometimes offered. In this scenario, invoices are submitted with a notice of them indicating that the “invoice has been assigned to an invoice finance provider”.