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How an Invoice Discounting Facility Can Help Your Business Grow
Long invoice payment terms can squeeze cash flow and put a strain on liquid capital, making it difficult to allocate funds for expansion. Often businesses have to watch opportunities pass by as they lack the funding support needed to react in a timely fashion.
Locked in a cycle where each invoice payment provides only scant breathing room and funds are used as soon as they come in, SMEs and larger enterprises can both find themselves stagnating.
At Clifton Private Finance, we help businesses improve their liquidity and flexibility through invoice discounting solutions. Explore how an invoice discounting facility can help your business grow with this comprehensive overview.
Why Use an Invoice Discounting Facility?
One of the largest challenges for B2B businesses managing their cash flow is the traditional structure of the invoice system. Evolved from long-ago business practices where instant money transfer simply wasn’t possible, invoice terms only benefit your clients, but can put financial strain on your business.
Invoice discounting helps restore some of that balance, using a third-party lender to release funds from an invoice for use immediately, rather than waiting 30, 60, or 90 days for the invoice to be paid.
An invoice discounting facility:
- Is discreet - With the relationship between your business and your customers undisturbed, invoice discounting offers a level of confidentiality that other solutions cannot provide.
- Is rapid - New invoices can be added to the facility without delay, immediately increasing the credit limit and available funds.
- Improves cash flow - Running alongside your main accounts for use only as and when needed, an invoice discounting facility provides liquid support for your operational expenses.
- Enables larger contracts and projects - With an established invoice discounting facility, you can take on larger jobs with the confidence that you have the funds needed for both long-term investment and short-term boosts to both personnel and equipment.
- Eases administration - Once in place, managing the facility is simple, reducing the need for future finance applications.
- Releases capital for seizing opportunities - Untouched capital remains available for growth projects, time-sensitive investments, and to react as soon as potential possibilities are available.
- Grows with you - As you increase your turnover and take on larger-scale work, your facility can expand accordingly.
If your business deals directly with other companies, with the majority of turnover brought in via invoicing, then you may be eligible for a cost-effective invoice discounting facility. Once in place, your business can run as it should, able to concentrate on its development rather than chasing the next payment in order to stay afloat.
The Structure of Invoice Discounting Facilities
An invoice discounting facility provides an ongoing line of credit that you can dip into as you need. Once put in place, newly generated invoices are reported to the lender, which increases the credit limit accordingly.
Funds are immediately available, and repayment is made as the invoices are paid by your clients. With a constant flow of invoices being issued, the facility size ebbs and flows but always ensures you have the cash flow support you need to keep operations running at peak capacity.
The process is as follows:
1 - Invoice Discounting Facility Is Set Up
Our team at Clifton Private Finance will work with you to determine the size of facility you need, match you to an appropriate lender who understands your industry and can offer competitive interest rates, and complete the initial application.
Your facility will have an agreed loan-to-value (LTV), often between 55% and 70%. The exact size will depend on your circumstances, current creditworthiness, and an assessment of your trading history, as well as potentially an evaluation of your main clients’ business stability.
2 - Invoice Discounting Facility Opens
The present batch of outstanding invoices will be added to the facility and the line of credit opened with a limit based on the LTV and the size of your current accounts receivable.
Monies will be available for use immediately.
3 - Funds Used
As you need it, the facility will be used to support your cash flow.
4 - Interest and Fees Charged
Interest is calculated daily based on the balance of the facility at the end of each day, and accrued monthly to the account.
Some invoice discounting facilities include an ongoing monthly line fee, which will also be added to the account where appropriate.
5 - Invoices Paid
Once an invoice is paid, it will reduce the balance of the facility. Depending on how your facility is set up, invoices may either be paid to you for you to then repay the balance to the lender, or directly to the lender where any excess is released directly to your main account.
Your credit limit will be reduced by the relative value of the invoice cleared.
6 - New Invoices Issued
As soon as you issue a new invoice, this can be copied to the lender for immediate addition to the facility.
The credit limit of your discounting facility will be raised by the appropriate amount, and new funds will become available immediately.
7 - Facility Renewed or Closed
At the end of the term, you can choose to renew the facility for a further term or close the account by clearing any outstanding balance.
Uses for an Invoice Discounting Facility
An invoice discounting facility provides a strong line of support for your business day-to-day that can lift the burden of cash flow from your bank account, improving your agility for business investment.
Some key uses include:
Stabilising Payroll
Making sure your employees are paid on time is an essential obligation for your business. With an invoice discounting facility in place, you will never worry that salaries and wages cannot be paid, even when invoice terms are long.
Consider this illustrative example of ABC Plumbing and Heating:
James of ABC P&H had long been looking to expand his business beyond the small home-based customers who had formed his key market for many years. Working with a business client who offered larger contracts and ongoing work would help him gain reliable monthly income and allow him to expand his workforce - or so he believed.
Used to smaller customers who paid as soon as the job was done, James didn’t have the financial infrastructure in place to deal with the long invoicing terms of the new local housing association client he secured.
Having mildly exaggerated his capacity to obtain the contract, James found that he and his team were having to put in more hours to meet the demand, and he’d had to bring in extra contractors and take on new staff, too.
The client’s account team patiently explained that he’d missed that month’s processing run, meaning the invoice would count for the next month, after which it was on a 90-day term and would be paid when that period was ended. James couldn’t believe it - he knew there was no way he could maintain such heavy operations for so long without getting paid.
James came to Clifton Private Finance for help. After discussing some options, it was clear that an ongoing invoice discounting facility was the right solution. With a reliable client and a second in negotiation, plus his existing business trading history, ABC P&H secured a revolving credit facility at 60% loan-to-value and a competitive interest rate - exactly what James needed to meet his payroll obligations and keep operations running.
ABC P&H weathered the storm. James continued to invoice the housing association each month, adding those new invoices and others to the facility. He was able to pay all existing team members and confidently continue to build. Once the money started properly coming in a few months later, James could lean a little less on the facility, but moved forwards with the peace of mind knowing it was there whenever he needed it.
ABC P&H grew faster and more efficiently than he believed possible, and by the end of the year, when time came to renew the facility, James’ team had grown four-fold, and he had secured two more large-scale clients.
Purchasing Stock
Suppliers and manufacturing businesses can often find themselves needing stock while payments from previous contracts and sales are still outstanding.
In this situation, an invoice discounting facility gives you the flexible funding you need to keep stock and material levels at a manageable constant, avoiding worrying dips that stifle new orders while you wait for older invoices to clear.
Taking on Larger Projects
When you are looking to grow your business, being able to say ‘yes’ to a project that brings in a valuable new client, develops your portfolio, and offers a good profit margin is extremely important. Sadly, too often a lack of available investment capital can stifle such plans.
An invoice discounting facility may provide the support you need to bring in larger contracts. You can dip into the facility to enhance your existing capital, confidently secure that other ongoing costs will be covered as you go on. Initial invoices and mid-stage milestone invoices effectively release funds as soon as they are written, and cash flow is smoothed.
Managing Seasonal Fluctuations
Many industries suffer the financial ebb and flow of seasonal peaks and troughs. During low-revenue months, cash flow can become difficult to manage. This situation is made even more frustrating with the knowledge that the money is ‘just around the corner’.
With an invoice discounting facility in place, seasonal fluctuations are smoothed out, allowing you to balance your finances with an annual overview and overcome the challenge of weaker months.
Supporting Marketing Initiatives
Marketing is traditionally one of the areas of business that suffers when cash flow is tight. However, this can become a cascading problem, with dips in marketing campaigns resulting in less business and tighter cash flow later down the line.
Maintaining ongoing marketing is essential to ensure your business grows. An invoice discounting facility provides a steady stream of financial support that means these ‘lower priority’ initiatives are not put aside to your business’s long-term detriment.
Improving Supply Chain Positioning
When your cash flow in order, your business becomes a stable part of any supply chain. This can provide a positive knock-on effect where invoices presented to you for payment can be cleared early - saving your next-link supplier the very problem you have been mitigating through an invoice discounting facility.
Early payments in this manner will not only improve your relationship with your suppliers but may open the door to better pricing, discounts, or more flexible payment terms in the long-term.
Mitigating the Impact of Late-Paying Customers
Not only are invoices slow to pay, but they are also not guaranteed. If your customers are themselves struggling or simply inefficient, then you may find your expected payment dates slipping and the money being further delayed.
In some cases, you may even like to extend flexible payment terms to your clients, knowing that you don’t put strain on your own cash flow to do so. This improves relationships and increases your value in a competitive marketplace.
Protecting Cash Reserves for Emergencies
With your capital no longer under strain, having an invoice discounting facility means you can react to emergencies with a cool response. Problems that would previously have created difficulties are simpler to solve, and operations can continue without disruption.
Obtaining an Invoice Discounting Facility with Clifton Private Finance
The business finance team at Clifton Private Finance is here to help. Our expert advisors will discuss your business structure with you, taking a holistic approach to your cash flow and funding needs to offer the best-suited options for your company.
For B2B businesses that currently find balancing cash flow challenging, or that are struggling to expand due to undue pressures on existing capital, an invoice discounting facility is a powerful and cost-effective solution.
With access to the full market of specialist lenders across the UK, Clifton Private Finance is well-positioned to match you to an invoice discounting lender who properly understands your industry and the fine nuances it brings. We will work to secure you the right facility that provides your business with the support it needs to grow.
Book a free consultation with a CPF business finance advisor today.
