Invoice Discounting

Invoice Discounting is similar to Factoring in that the lender advances an agreed percentage of the invoice value – typically 80-90% of the total figure. Invoice Discounting can be confidential, such that the customer is unaware of the facility, whilst the supplier can retain responsibility for all sales ledger administration.

Invoice Discounting can only be provided where goods or services are supplied between one business and another on credit terms. Bad debt protection may be included in the facility if required.

How does it work?

Invoice Discounting works in much the same way as Factoring, with one or two differences. With Invoice Discounting, the business sends its sales day book listing or uploads invoices to the lender instead of copy invoices, and retains responsibility for running the sales ledger, issuing statements, collecting payments and chasing slow payers if necessary.

The business pays the money it collects into a special bank account (trust account) and notifies the lender. The lender then pays the balance of the invoice totals, less an agreed charge. Charges consist of a service fee as a percentage of the annual turnover and an interest charge on the funds advanced to the business. The charges are negotiated with each business on a case-by-case basis.

When should I consider Invoice Discounting?

Invoice Discounting suits larger businesses with a higher turnover – usually upwards of £250,000 – that are sufficiently experienced and resourced to be able to manage their own sales ledger and are looking at alternative (or additional) methods of borrowing.

It is not untypical for Invoice Discounting to be used as a refinancing tool, or as part of a package of finance to facilitate a management buy-out (MBO) or buy-in (MBI).

What are its advantages?

The principal advantage is that it gives a business an immediate injection of cash, usually within 24 hours, and the facility grows as the business expands. It also has the advantage of leaving the business in charge of its sales ledger.