Invoice Discounting

Invoice Discounting  

Running a successful business is a difficult enough prospect even when everything goes smoothly; throw the occasional spanner into the works and it can become almost impossible. Thankfully, business finance is here to help smooth out the rough parts. One of those potential rough patches comes in the gap between work being done and an invoice being issued, and the customer finally paying that invoice. For that, many businesses look to invoice discounting.

Using Invoice Discounting to Shorten Payment Terms

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

• Whether you work on short payment terms of five or seven days, or more extended terms such as 30, 60 or even 90 days, that interim period is a time when the pressure is unfairly all on you as the supplying business. You have done the work, supplied the goods and services, and yet it is your customer who is able to relax and sit back, not being asked to actually pay for those goods and services for weeks or even months.

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 the majority of the sum accepting the outstanding invoice as collateral. Your business gets the money as soon as 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

(-) 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, on £10,000 of accounts receivable, you can use invoice discounting to free up £7,500 to £9,000.

(+) Fast Application and Decision

(-) 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 move forward with invoice discounting.

(+) Invisible Invoice Finance

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Invoice Discounting for Business Growth

One other huge benefit of invoice discounting is its ability to further your business expansion. 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 makes sure this never happens and is a strong tool to use to further your business expansion without being 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 make use of invoice discounting as an ongoing solution to your cashflow; look to selective receivables financing when there is a one-time difficulty that needs an immediate solution.

Alternatives to Invoice Discounting

Business finance comes in many varieties and choosing the right product for your need is essential for good financial management. Speak to us at Clifton Private Finance if you are unsure about what options are best for your business and one of our experts can discuss invoice discounting or any of the 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, who then take control of the debt and management of it for you. Invoice factoring is less discrete than invoice discounting, but has a number of advantages to make it a good option for many. Read our article on invoice factoring for more information about this excellent option.
• Standard business loan - Either 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, it is possible that a standard business loan is well suited to your need.
• 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.

Removing the Need for Invoice Discounting - Shortening Your Payment Terms

To avoid the need for financial support altogether, you may wish to consider a reduction in 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 an agreement that has become commonplace, and 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, however, is very poor business practice and should be avoided.

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Applying For Invoice Discounting

If you are the director of a SME and are looking to improve your cashflow 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 need, 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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