Invoice Discounting for Manufacturing - Closing the Payment Gap

Funding manufacturing can seem like a catch-22, requiring the cash to meet the investment in raw materials and production costs well in advance of an invoice being paid. Significant capital reserves are often drained dry before work can begin, leading to stresses throughout the system while a trusted payment waits out of reach, set to extended payment terms that can seem excessive.

When a potential deal is particularly valuable, securing that order provides essential growth but without supportive funding, realising that potential can be challenging. Invoice discounting provides the capital needed.

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What is Invoice Discounting?

Invoice discounting provides funding secured by unpaid invoices as collateral. It can be structured as either a one-off loan or an ongoing revolving credit facility (RCF), providing flexibility that is tailored around your business’s needs.

As part of the wider umbrella of invoice finance, invoice discounting offers cost-effective funding that manufacturing businesses can use to bridge the gap between raising an invoice and receiving final payment.

Secured by accounts receivable, invoice discounting represents a relatively low risk for lenders, reflected by:

• Greater levels of acceptance for manufacturing firms than unsecured finance
• Typically lower interest rates than many other similar-sized loan and credit facility options
• Loan values tied to invoice size rather than business credit rating
• Higher credit limits for revolving credit facilities, aligned with business turnover and debt books

Invoice discounting brings forward the money locked by lengthy payment terms, freeing capital to support operations and improve agility.

Through invoice discounting, as much as 85-90% of outstanding invoices can be released early, repaid once the customer settles the invoice at the end of the payment term.

The Structure of Invoice Discounting

Invoice discounting covers two core structures, each able to be tailored to suit your specific business need:

Selective Invoice Discounting Loan

For businesses that need invoice discounting for a one-off lump sum loan, leveraged against a specific project or client, a selective invoice discounting loan offers a solution.

This enables you to select one or more unpaid invoices from your debt book and utilise their value as collateral against an exit-based loan.

For manufacturing businesses looking to grow with a major new customer, who want funding to obtain the resources to fulfil that order, a selective invoice discounting loan is often the perfect solution.

With an invoice discounting loan:

• The chosen invoices are presented to the lender as collateral
• The lender agrees a loan-to-value and interest rate for the loan (typically 80-90% LTV)
• A lump sum is provided for use
• Interest accrues until the customer pays the invoice(s)
• The loan is settled, including any fees and interest

This form of single-exit loan has no monthly repayments, leaving cash flow unaffected by a debt burden.

Whole Invoice Discounting Revolving Credit Facility

A revolving credit facility (RCF) is a continuous line of credit that provides flexible funding support for use as-and-when is needed. Leveraged against all outstanding invoices, irrespective of customer or allocation, a whole invoice discounting RCF provides a credit limit that scales in line with the business’s accounts receivable.

This provides substantial capital for business use as needed, with credit increasing as invoices are issued and added to the facility, and repaid in chunks as each invoice is settled.

Once set up, a revolving credit facility offers continuous access to funds, with each new invoice increasing the facility immediately upon receipt. This removes the delays caused by payment terms and can often be used to provide customers with favourable terms to improve relationships: extending 60-day and 90-day terms to customers has little direct cash flow impact when a dedicated revolving credit facility exists.

The Cost of Invoice Discounting

Invoice discounting facilities are cost-effective solutions to manufacturing funding challenges, with competitively low costs that reflect the relative stability of expected income that has already been invoiced.

For selective loans, costs are:

• Arrangement fee - approximately 1-3% of the advance (£255-£765 fee on a £30,000 invoice at 85% LTV).
• Interest rate - typically from 5.5% to 11%, based on creditworthiness and business profile, charged pro. rata.

For revolving credit facilities, costs are:

• Service fee - approx. 0.2% to 1% of turnover annually.
• Discounting fee - approx. 2.0-4.0% above base rate.

RCF discounting fees are only charged on the portion of the credit facility that is used, potentially reducing costs through efficient management.

Invoice Discounting for Manufacturing - An Illustrative Example

With Clifton Private Finance, a selective invoice discounting loan is offered at 85% of the issued invoice (a loan total of £255,000). This would be enough to secure the much needed materials, and is agreed at an interest rate of 7.1%, and a £2,550 arrangement fee.

When the invoice is settled at the end of August, the invoice discounting loan balance is settled:

• Original loan: £255,000
• Arrangement fee: £2,550
• Interest accrued: £4,526
• Total repaid: £262,076

The remaining £37,924 from the invoice is added to the working capital.

While the immediate problem of supply was solved, MMM is still under pressure. Salaries and other working costs have absorbed current capital and reserves, and though a second invoice has been issued, there is another delay of almost three months before it will be paid.

Having had a positive experience, MMM returns to Clifton Private Finance to secure an ongoing revolving credit facility. This is quickly arranged with the same lender with a 0.5% service fee and a discounting fee of 6.1%.

With the full accounts receivables leveraged, the credit line is substantial enough to immediately relieve the pressure on cash flow, allowing MMM to meet all its obligations and take advantage of a dip in the market to secure more components at a competitive price.

The supply deal is a success, and the distributor continues the contract into a second year.

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Invoice Discounting vs. Invoice Factoring

Invoice factoring is another invoice finance solution that provides an alternative to invoice discounting. Invoice discounting is structured as a loan, with the sum repaid when the invoice is settled.

In contrast, invoice factoring passes full control of the invoice to a third-party factoring company, who advance a similar portion to you. Collection of payment then becomes the responsibility of the factor directly, the remainder of the proceeds is passed to you once the advance and fees are subtracted.

Invoice factoring:

• Is transparent - Customers are directly contacted by factoring companies, involving them in the factoring process. This may be perceived negatively and could affect relationships in some cases.
• Offers alternative application evaluation - Credit control risk is moved to the factoring company who have established systems for collection, lowering the risk of default. This can lead to improved application success rates in some situations. Additionally, factoring companies explore customer credit profiles for underwriting in addition to your own, potentially improving viability further.
• Provides credit collection systems - While invoice factoring should not be considered a replacement for bad debt collection services, experienced and efficient credit control can help when dealing with problems. Note, however, that the ultimate responsibility for debt repayment lies with you should a customer default payment.

Like invoice discounting, factoring is more often set up as a scalable revolving credit facility, with new invoices factored as they are issued.

Invoice Discounting vs. Invoice Factoring

Explore invoice factoring in our knowledge base.

Alternatives to Invoice Discounting for Manufacturing

Manufacturing businesses have several options available to them to secure funding suitable to help both capital needs and ongoing cash flow support. While invoice discounting offers a low-cost and effective solution for both short-term pressure and continued liquidity, other debt finance products may be more suitable in some circumstances.

At Clifton Private Finance, we work with you to explore the range of accessible products, evaluating your true business needs to compare alternatives with a view to minimising overall cost and maximising flexibility and application success.

Purchase Order Finance

Invoice discounting is useful to manufacturing businesses that have reached a delivery stage, effectively bringing payments forward to bridge the gap between an invoice being issued and its payment.

Many businesses, however, need to fund raw materials and other stock purchases far before the products have been manufactured and an invoice can be generated.

Purchase order (PO) finance explores funding at an earlier point in the workflow, raising finance against the initial purchase order or contract to supply. For lenders,      purchase order finance has a slightly higher risk profile than invoice discounting, resulting in less competitive rates and more complex underwriting, but its availability at an earlier stage of the process can help secure essential purchases at a time when invoice discounting is not yet possible.

Learn more about purchase order finance with our in-depth guide.

Stock Finance

Stock finance is asset-based funding that uses existing stock as collateral. For manufacturers with a stable warehouse of products, stock finance (also known as inventory finance) can help fund future expansion and projects in a similar way to invoice discounting.

Like invoice discounting, stock finance can be structured as either a lump sum loan or a revolving credit facility, with limits tied to the movement of the supporting stock levels. As products are manufactured, they can be added to the asset portfolio, increasing available credit until they are sold on to customers.

At Clifton Private Finance, we can discuss stock finance as either an alternative to invoice discounting or alongside a discounting solution for a comprehensive funding package that provides the essential finance support you need to grow your business.

Unsecured Business Loans

Traditional unsecured loans offer a fast and easy application for manufacturing businesses with a confident credit history, providing funds that can be used for any business purpose.

Without collateral, however, unsecured loans present lenders with a larger risk profile, which      typically results in greater interest rates and smaller sums offered. When compared directly to specialised invoice discounting, an unsecured loan is often significantly more costly.

For manufacturing firms with significant accounts receivable, unsecured loans rarely offer a superior alternative to invoice discounting unless a monthly repayment schedule is preferred over the discounting exit-based repayment.

Second-Charge Mortgages and Secured Loans

Manufacturing businesses that own property may look to second-charge mortgages and property-secured loans to raise capital when needed. While the application process for these secured loans is often longer than invoice discounting, the stable nature of property equity as collateral typically results in lower interest rates and higher loan sizes, making them an excellent alternative in many cases.

However, care must be taken regarding repayment considerations. Secured loans are configured with a regular monthly repayment schedule, which can affect cash flow and affordability for the duration of the loan term, potentially complicating other debt applications in the future.

Invoice discounting loans and revolving credit facilities operate with a defined exit-based structure, allowing rapid exits that reduce the impact for future expansion initiatives.

Discuss the pros and cons of secured loans vs. invoice discounting with your Clifton Private Finance adviser.

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Merchant Cash Advance

Manufacturing businesses that sell directly to consumers may have considerable card transaction income rather than traditional invoicing systems, limiting the potential of invoice discounting. For those B2C businesses, merchant cash advance (MCA) offers an alternative.

Businesses that enjoy both B2B invoice income and B2C card transactions could combine merchant cash advances with invoice discounting for a comprehensive funding plan that leverages the complete multi-channel income of the business.

To understand more about merchant cash advances, read our guide articles here.    

Credit Cards and Overdrafts

Short-term cash flow needs may be supported through unsecured revolving credit facilities, including business credit cards and bank account overdrafts. Like an invoice discounting RCF, these offer flexible funding when needed.

However, as credit cards and overdrafts represent unsecured funding, the terms are rarely more favourable than tailored invoice discounting RCFs, which provide:

• Larger credit limits that scale in line with accounts receivable
• Typically lower discounting fees than credit card or overdraft interest rates
• Repayments are aligned with customer invoice settlements rather than monthly minimum payments

Unsecured credit facilities are also easy to overlook, often generating unseen charges unless vigilantly managed. This can lead to a spiralling level of debt that becomes costly to the business.

The nature of invoice discounting repayment and administration often heightens awareness of the facility, encouraging careful management and avoiding unwanted debt complications.

Bridging Finance

Bridging finance is an option when rapid funding is required for manufacturing firms with property equity in:

• Warehouses
• Factories
• Office facilities and headquarters
• Land

By leveraging these powerful assets, companies can gain access to rapid funding that can be used to purchase or renovate premises, obtain materials, fund expansion programmes, or support emergency capital requirements.

As an alternative to invoice discounting, bridging finance is efficient and scalable, offering a similar exit-based repayment structure that meets short-term goals.

Bridging finance can be used in addition to invoice discounting to leverage both property and accounts receivable together for large-scale, short-term projects, unlocking opportunities that cannot be realised by a single funding stream alone.

Speak to a Clifton Private Finance bridging adviser, or explore our extensive knowledge base articles to learn more about bridging finance.

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Invoice Discounting for Manufacturing with Clifton Private Finance

At Clifton Private Finance, we work to aid manufacturing businesses with both immediate and long-term finance requirements, making sure you have access to the funding you need.

As a whole-of-market business finance broker, we work with the wide UK network of specialist lenders and banks to secure invoice discounting and other suitable finance products for our clients.

We can arrange:

• Selective invoice discounting loans from £25,000+, based on the size of your accounts receivable.
• Revolving credit facility options starting at £100,000 that scale according to turnover.
• Combined invoice discounting and other debt finance solutions that meet complex manufacturing requirements.

Our advisers will work with you to meet lenders’ criteria, helping you develop an application package that properly reflects your business position and maximises the chances of loan approval.

To obtain invoice discounting, you should prepare:

• Full details of your accounts receivable, suitable to cover the size of the loan or facility you require.
• Accounting information and forecasts.
• Details on your plans for the funding use and capital requirements.

The lender will evaluate your application based on the information provided, as well as your business credit score.

For some facilities, lenders may also explore the creditworthiness of your customers, using their payment histories to help form a fuller picture for efficient underwriting.

Working with Clifton Private Finance means:

• Comprehensive advice from an invoice discounting expert, well-versed in the manufacturing sector     .
• Comparison with other debt finance options to ensure you choose the right funding structure to meet your business needs.
• Ongoing support for the full lifetime of your invoice discounting facility.

Book a consultation with Clifton Private Finance today.

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