Invoice Discounting for Dummies

Do you wish you could improve your business’s cash flow? Wish you had access to more working capital? Have you heard about invoice discounting but are unsure about exactly what it is? Wondering whether it could be something that could benefit your business? Below we have our ‘Invoice Discounting for Dummies’ guide that explains what invoice discounting is in plain and simple language and will enable you to see if it is something that might be of use to you and your business.

What is invoice discounting?

Invoice discounting is simply a way for a business to borrow money against cash that is owed by its customers.

1. When you raise an invoice, you go to your invoice discounting company who will then lend you money against the invoices) at an agreed percentage of their total value. There will be an agreed fee for this.
2. As your customers pay their invoices to you, that money is transferred to the invoice financier, lowering the amount that you owe. You may choose to borrow more money on new invoices or you may wish to repay in full.
3. The process is very similar to factoring but unlike factoring, you are responsible for managing and chasing your own debts

What is a factoring company?

An invoice discounting company is a financial services business that offers invoice discounting services to a range of businesses. Some may work with all kinds of businesses, others may tend to specialise in particular sectors/types of business. Companies who use an invoice discounter borrow money against their invoices at an agreed % of their value. As the business’s debts are repaid, they repay them to the invoice discounting company. The invoice discounting company charge the business a fee for this. Lots of companies across the UK use invoice discounting as well as factoring and other forms of alternative finance to access vital working capital to keep their cash flow healthy.

What are the advantages of invoice discounting?

● Unlike factoring in which your customers will know that you are using a factoring company, invoice discounting is completely confidential so your customers will have no idea that you are borrowing against their invoices.
● You can retain a closer relationship with your customers because your business is still managing their accounts.
● It gives you quick access to vital working capital and can improve your cashflow.

What are the disadvantages of invoice discounting?

● Because their is a cost involved with invoice discounting, it does mean that you will lose small amount of profit from the invoices concerned.
● The vast majority of invoice discounting companies only deal with B2B businesses. If you sell to the public, you may have to find an alternative source of finance.
● Using invoice discounting can reduce the number of ‘book debts’ you have which means that it could impact on how successful you are in gaining other forms of finance.

If you would like to know more about invoice discounting and how it could help your business then don’t hesitate to contact Factoring Solutions for a free, no obligation chat on 01827 707680


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