What is invoice discounting?

Invoice discounting can be provided to a client or potential customer who wishes to improve the working capital and cash flow of their company. It works by allowing the business to draw against its sales invoices before the customer has actually paid. It allows you to immediately release the value of your invoices whilst still managing the client relationships that you have built.

Why is it beneficial to you?

It can be beneficial in a number of ways; it can increase the health of your cash flow and therefore increase the opportunity for you to extend and potentially invest further in your business without worrying about money being tied up for long periods of time.

It can allow you the flexibility of offering adaptable repayment terms to your clients but with the safety of knowing that you will be paid and that your cash flow will not be affected by potential bad debtors.

How does it work?

Once an invoice has been sent to a client then a copy is forwarded to the discounting provider who then advances a percentage agreed between you both within a short period of time. Then once the remaining payment has been collected from the customer by your provider, the remainder of the balance owed to you, is deposited in your account less the charges for this service.

Every case and client differs but generally speaking 80-90% of the invoice value will be released once that invoice has been generated. The charges are generally a small percentage of the overall value, additional costs can be incurred if bad debt protection and other services that the company provides are taken out. But primarily it allows your company to concentrate on running and developing the business without having the worry of chasing bad debt.

What companies can apply to get invoice discounting?

Generally invoice discounting is only available to business to business customers that provide products or services with credit terms attached. Some providers will stipulate a turnover that your company needs to be achieving before setting up this service. If your company has a sound sales ledger and a good credit control team then this form of commercial finance could be just what your company needs to provide it with an enhanced working cash flow.

What can invoice financing be used for?

Invoice financing can provide a number of solutions for a business. By releasing monies from a sales invoice as soon as it has been raised means that a businesses cash flow can be fixed quickly and the day to day management of a company can be shifted.  You can then concentrate on growing and moving the business forward. By releasing cash flow it can help to re-finance an existing facility, increase your stock levels to enable you to buy at better or discounted rates, train staff or take on more staff. The possibilities that this service allows are huge.  All Finance Directors should consider this option as it’s highly beneficial to the development of a business.

By Harry Price

Harry Price is a freelance writer, artist and food lover who lives on the south coast with his wife and 3 dogs.  In his spare time, his doggy pals double as his running buddies.