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Invoice Discounting

The basic facts about invoice discounting…

Many businesses turn to invoice discounting as a means of keeping their cash flow alive and kicking. When you raise a customer invoice, you get paid 85% of the due balance. When the customer settles the invoice, you are paid the outstanding balance, minus a service fee. At month end, your discount fee, similar to interest, is based on the amount of money you have borrowed during the intervening period between invoicing and settlement.

Skimming beneath the surface for newcomers to invoice discounting…

Similarly to invoice factoring, invoice discounting generates finance based on your outstanding customer invoices. However, invoice discounting is a little less complex than invoice factoring, as the responsibility for credit control remains firmly in your hands, without third party intervention. Funders providing cash for invoice discounting do not receive comprehensive details about your debtors list. Hence, you are more likely to be offered invoice discounting if you have a stable track record and proof of your credit control procedures.

Invoice discounting is becoming increasingly popular with both borrowers and lenders alike. For many businesses, it provides efficient and fast cash flow solutions on more attractive terms than traditional overdrafts. It is perfectly normal and usual of your debtors list, including both timely and untimely debts, is your biggest business asset. Having decided that invoice discounting might work for your business, it is therefore absolutely essential that you invest the time and effort in to selecting the best service provider for you. Failure to do so can lead to an inappropriate appointment that hinders rather than helps, is detrimental to your financial position, and can even jeopardise your business.

Bear in mind that recent economic turbulence has ignited an explosion of factoring companies. The sector is largely unregulated and not all invoice discounting services are created equal. At Invoice Finance Scotland, we have a proven track record of client partnership in this field.

Various types of invoice discounting…

  • Recourse and Non-Recourse – recourse invoice discounting includes bad debt protection that fulfils much the same role as credit insurance. Non-recourse invoice discounting offers no safeguarding against the risks posed by bad debts. Many businesses prefer to err on the side of caution by opting for recourse invoice discounting, which they also find more cost effective than taking out separate policies.
  • Domestic and Export – relevant invoice finance can be provided for both UK and export debtors, in a variety of different currencies. Businesses with overseas subsidiaries, for example, might opt for several lines of finance in the countries in which their companies are based.
  • Disclosed and Confidential – dependent upon individual circumstances, the identities of funders may be disclosed to clients, or may remain confidential. The same can happen in reverse.
  • High Concentration and Single Debtor – businesses with multiple debtors, or a high concentration of debtors, are often more attractive propositions to funders than businesses that rely on a single debtor, or just a handful of debtors. In cases of high concentration, any potential risks are distributed, whereas single debtor businesses can experience restricted funding as a result of all their eggs being in minimal baskets.

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IFS Guide
IFS Presentation
NACFB - Helping Fund UK Businesses  Federation of Small Business