Invoice Discounting

Invoice Discounting  

Struggling with cash flow due to delayed invoice payments? Invoice discounting can help your business access funds quickly without waiting months for your customers to pay. By advancing up to 90% of your unpaid invoices, invoice discounting provides immediate cash flow relief, allowing you to cover essential expenses like salaries, suppliers, and operations.

Whether you're a small business or a larger company, this financing solution offers flexible, confidential support while keeping your client relationships intact. Learn how invoice discounting can bridge the gap between invoicing and payments and help your business grow.

Written by: Sam Hodgson

Key Takeaways:

• Provides a quick solution for cash flow issues by advancing most of the invoice value, typically between 75-90%, without your customers knowing.
• Reduces the time between issuing invoices and receiving payments from months to hours.
• Other financing options include invoice factoring, business loans, and credit lines.
• Choose between selective or full ledger discounting based on business needs.

What is Invoice discounting in Layman's Terms?

Invoice discounting is a way for businesses to get paid faster for the work they've already done. Instead of waiting weeks or months for customers to pay their invoices, a company can borrow most of the money owed to them from a lender right away. Once the customer pays the invoice, the business repays the lender. It's a quick way to get cash when you need it without chasing down customers for payment.

Invoice payment terms shouldn’t really exist. A hangover from years of inefficient banking, they have no justification in a modern world of immediate bank transfers, yet payment terms refuse to go away.

Imagine going into a supermarket and expecting the same delay between taking your shopping home and having to actually pay for it!

Yet, B2B businesses are expected to weather the storm.

Invoice discounting is a short-term loan to plug that gap for you. Instead of waiting for the full invoice term to receive your money, a finance company lends you most of the sum, accepting the outstanding invoice as collateral. Your business gets the money once the invoice is issued and simply pays back the loan once your customer clears their debt. Effectively, invoice discounting shortens the payment terms from months to hours.

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The Pros and Cons of Invoice Discounting

(+) Fixing Your Cashflow Problems

The greatest benefit of invoice discounting is how it unties your business finances and enables you to make good on your financial obligations. Salaries must be provided, suppliers paid, bills covered, and the business cash flow available for anything that might come up. Invoice discounting ensures that you are not left scrabbling for cash while praying every day that your customers choose to pay your invoice a little earlier than they have to.

(-) Loan to Value

Invoice discounting is a loan that’s based on the value of your accounts receivable - that is, the sum of your relevant unpaid invoices. Like most loans that are tied to a form of collateral, you won’t be able to get the full 100% of the invoice value. Depending on your credit status and other factors, such as your business sector, turnover, and your invoicing history, you are likely to be offered a loan-to-value (LtV) of 75% to 90%. That means you can use invoice discounting on £10,000 of accounts receivable to free up £7,500 to £9,000.

(+) Fast Application and Decision

Unlike many other secured loans with their lengthy set-up processes, invoice discounting offers a rapid process from application to cleared funds. It is a form of business finance that has been developed for the very real need of business cash flow, and applications are considered and processed accordingly.

(-) Interest and Fees

Like any loan, invoice discounting is not free. Understanding the cost to your business is important before making any final decision to proceed with it.

(+) Invisible Invoice Finance

The other main type of invoice finance, invoice factoring, involves selling the debt to a third-party financier. While this does come with some advantages, such as the experience and credit control services of an established factoring company, it can create a rift between you and your customer. A lack of understanding regarding invoice finance, especially by customers, can be a significant disadvantage to this type of efficient business financing. Thankfully, the confidential nature of invoice discounting avoids any issues with your customers - they will never know you have taken out a loan against their outstanding invoice and will not judge or question your choice.

How Can Invoice Discounting Help Your Business?

Another huge benefit of invoice discounting is its ability to expand your business. Successful businesses need to be able to take advantage of opportunities that come their way, and most often, that means having the cash available to do so. When your finances are tied up in multiple unpaid invoices, it can be painful to see potentially life-changing opportunities slip by, unable to be grasped.

Invoice discounting prevents this and is a strong tool for furthering your business expansion without putting yourself at the mercy of your clients.

Looking for more information? Watch our short video below to learn about invoice finance in more detail.

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The Difference Between Entire or Selective Invoice Discounting

The simplest form of invoice discounting is selective receivables financing, where a loan is provided to cover the unpaid invoices of one of your customers.

An alternative to this is full invoice discounting, where the complete ledger of accounts receivable is utilised with the financing company, opening an ongoing line-of-credit agreement that provides rapid access to funds as soon as invoices are passed on.

Consider entire ledger invoice discounting if you believe you will want to use invoice discounting as an ongoing solution to your cash flow; look to selective invoice financing when a one-time difficulty needs an immediate solution.

Alternatives to Invoice Discounting

Business finance comes in many varieties, and choosing the right product for your needs is essential for good financial management. Speak to us at Clifton Private Finance if you are unsure about the best options for your business. One of our experts can discuss invoice discounting or any other financial packages available with you to help. Some alternatives for cashflow finance when bridging the gap between invoicing and payment include:

• Invoice factoring - The other main form of invoice finance, invoice factoring, involves passing on your invoices to a factoring company, which then takes control of the debt and manages it for you. Invoice factoring is less discrete than invoice discounting but has a number of advantages that make it a good option for many. Read our article on invoice factoring for more information about this excellent option.
• Standard business loan - An unsecured business loan or an asset-based secured loan may provide the cash injection your business needs to see it through the short term. With a range of loan terms and options available, a standard business loan may be well suited to your needs.
• Credit cards and overdrafts - Despite their high interest rates and potentially costly fees, credit cards and overdraft facilities often provide the answer for many businesses looking for short-term credit. They are quick to obtain and easy to understand, making them a go-to choice for many.

Related: Invoice Factoring vs Discounting

Is it Worth Shortening Your Payment Terms?

To avoid the need for financial support, you may consider reducing the terms you offer your clients. Invoice terms are negotiable between supplier and customer, and often simply stating that you require invoices to be paid on more rapid 7-day or 5-day terms will be accepted by your customers.

The 30-day standard terms are nothing more than a commonplace agreement supported by the government as a limitation to uphold, but there is nothing that prevents you from requesting a more reasonable payment schedule - many respectable businesses will be understanding and accepting of your chosen terms as long as they are clearly stated in advance.

Changing terms once an invoice has been issued or without proper discussion is very poor business practice and should be avoided.

How Can You Get Invoice Discounting?

If you are the director of an SME and are looking to improve your cash flow through either full ledger or part invoice discounting, discuss your need with us at Clifton Private Finance. Our experts have access to a wide range of suitable financiers with products that will suit your needs and will work with you to find the perfect invoice discounting for your business.

Unlock the benefits of our invoice discounting service, including:

• Competitive rates that lead the market
• Rapid funding – receive finance within 5 to 7 days
• Access to a network of specialist lenders
• Expert advice and professional service

Explore the possibilities for your business. Connect with us now at 203 880 8890 or book a consultation below.

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