What is invoice discounting and how does it work?
Cash flow is essential to the success of your business, but what happens when your customers start dragging their feet when it comes to payment?
Well, all sorts of problems can arise from this including falling behind on your own invoices and not having enough to pay your employees on time. Both of which can seriously impact your business. The good news is that there is a way to access the cash that your customers owe you, even before they have paid, and you can do it without ever having to let them know that your company is making use of such a service.
What we are talking about here is a service known as invoice discounting, read on to find out more.
What is invoice discounting?
With invoice discounting you can access up to 95% of the values of your unpaid invoices on the day that you raise them. That means no more checking to see whether your customer’s payments have arrived or worrying if you can cover your bills if they haven’t! The invoice finance company will pay you the extra 5% when your customers pay you.
However, it is worth noting that while they seem very similar invoice discounting is different to invoice factoring. A subject that is covered in more detail is in the section below
Invoice discounting vs invoice factoring
At first glance, you would be forgiven for thinking that invoice discounting and invoice factoring are the same thing. After all, they both include using your unpaid invoices to access money.
However there are some important differences that are useful to know when making your decision. The first of these is that if you choose to utilise invoice discounting, your business stays in control of the debt. You will continue to do the credit control, and your customers will continue to pay your business, albeit into a different bank account.
Lenders will want to make sure that your business has a robust ‘back office’ prior to agreeing an invoice discounting facility. Keeping your accounting package up to date is a pre-requisite (as you will need to send reports to the lender at the end of each month). An invoice finance company will do a ‘survey’ prior to lending on invoice discounting to ascertain whether they deem the processes strong enough to run an invoice discounting facility. If they don’t agree, then you may get offered factoring as an alternative.
A key difference between factoring and invoice discounting is that invoice discounting is ‘confidential’ insofar as your customers won’t know of the invoice discounting company’s involvement.
Factoring is slightly different. The factoring company’s involvement with your customers is very apparent. Each invoice will have an assignment notice telling the customer to pay the factoring company, and the factoring company will call your customers to verify invoices and collect payment. Because the factoring company are actively involved in chasing customers for payment it is seen as less risky to them than invoice discounting.
Our dedicated team here at Redwood Business Finance will match you with one of a panel of over 90+ lenders based on your specific needs.
Now you know what invoice discounting is and how it differs from factoring you are (hopefully) in a better position to decide whether it’s a service that would benefit your company. In particular, businesses looking to free up cash to cover operating costs or take advantage of an opportunity can benefit from invoice discounting.
Finally, compared to taking out a loan or securing a line of credit with your bank, invoice discounting is easier and cheaper. Therefore, if you want to improve your business cash flow, this might be an option worth considering.
Have a question, or want to find out more? Why not speak to our friendly team who can help walk you through your options, and provide tailored recommendations on the best solution for your business. Simply complete the short form on our contact us page, and we’ll be in touch as soon as possible.
