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Some of the companies we work with
What is it?
Invoice discounting enables a business to engage a
company, usually a bank or other finance house, which allows them to
borrow money on a short-term basis, using the value of outstanding
invoices as security. Running a business is never easy; many
businesses fail because they do not have enough working capital or
cash flow to make the business viable. Invoices for work done or
goods supplied are issued to customers, who pay, but seldom in the
timescale requested (usually 30 days). Many businesses need the
money immediately and invoice discounting is a simple, and
straightforward mechanism for raising finance. The Asset Based
Finance Association, released figures, in 2010, showing that in the
previous year UK firms had raised £179.9 Billion through invoice discounting.
How does it work?
Invoice discounting is similar to the invoice factoring process; the financier releases a percentage of the value of the invoice within twenty-four hours of it being raised. At between 80% and 90%, the percentage made available differs little between discounting and factoring. In the recruitment industry, some financiers are prepared to release 100% of the invoice value; although this is unusual. The process invoice discounting process is as follows:
- The company raises two invoices; sends one to the customer; the other to the discounting financier;
- The discounting financier provides funds to the company at the agreed percentage value of the invoice;
- The company receives payment from the customer; and
- The company repays the invoice financier, plus charges and interest.
There are certain circumstances when invoice financiers may be unwilling to advance money, these include cases where:
- the financier knows that the customer to whom the invoice has been sent, is not credit worthy;
- the invoice is of low-value;
- the customer is based overseas.
Advantages of invoice discounting
There are several advantages to invoice discounting, including;
- Receiving a significant percentage of an invoice shortly after it has been raised, thereby increased working capital and cash-flow;
- Invoice discounting is a form of revolving credit which is subject to an overall limit agreed with the financier. As the company nears the limit, invoices are paid and the balance lowers, with the consequence that further credit becomes available;
- Customers are not aware that the company is using invoice discounting;
- The company continues to maintain their relationship with customers because managing invoices, credit control and chasing repayment remains in-house; and
- No major changes to a company’s financial systems are required.
Disadvantages of invoice discounting include:
- Costs are involved; the financier charges for providing the service and costs are deducted from the company’s profits;
- Financiers only deal in commercial invoices, not those involving members of the public;
- That as a result of invoice financing, the company has no “book debt” to use as collateral, and so may find it difficult to raise other forms of credit; and
- Invoice discounting can become habitual and difficult to disengage from.
What type of company is finance discounting aimed at?
Usually, a company will have an annual turnover in excess of £750,000 in order to be able to set-up an invoice discounting arrangement,
although this varies from one provider to another. Additionally, financiers will expect any company wishing to engage their services to already operate established and effective systems for invoice, sales and ledger, and credit management; the financer is likely to want to review these aspects of their client’s business on a regular basis. If your turnover is less than this invoice factoring
may be a more suitable solution.
How do I find it?
A company, which meets the above criteria, and which wants to set-up an invoice discounting arrangement will need to search the market to find a provider that can meet their needs. It is always a good idea to take professional advice before entering into a commercial agreement. In particular, the company should find a finance company prepared to offer it a total invoice financing limit that meets its needs, and achieves its intended goals in terms of working capital and cash flow.
What does it cost?
This will vary depending upon the provider you choose, and will be based on several factors such as your trading history, industry type, invoice values and turnover. This is why it is so important for us to look at many providers in order to find you the best deal.