What is Invoice Discounting?
Invoice Discounting is a highly flexible way for businesses of all sizes who offer trade credit to their customers to get access to working capital facilities, with a Bank or Finance Company, agreeing to purchase your sales invoices and then advancing an agreed percentage of these invoices to you, normally within 24 hours of their creation.
Typically, you will be able to raise between 75% and 90% of each invoice you raise, inclusive of VAT, where applicable. Unlike a factoring facility, Invoice Discounting leaves the responsibility of managing your sales ledger with you and is normally undisclosed to your customers. Customer payments you receive are paid into a bank account administered by the Invoice Discounter, after which you are credited with the balance, less any charges.
How does Invoice Discounting work?
The Bank/Finance Company will enter into a legal agreement with you that effectively purchases the eligible sales invoices and will then advance cash to you, up to the agreed prepayment percentage.
Eligible sales invoices are invoices that still remain unpaid, but not in dispute with your customer, 90 days from the end of the month in which the invoice was first raised, so in effect you can obtain financing on outstanding invoices up to 120 days from the first issuance. This is called the Recourse period. If you have particularly long trade credit terms that may see the Recourse period exceeded, some funders will agree to extend these terms for specific customers.
The funder will also need to be confident that your business has the necessary staff, expertise and systems to collect the outstanding sales invoices and to be able to produce meaningful management information when required.
Company A has outstanding sales invoices of £100,000 inc VAT all of which are within the 120 day recourse period and none are in dispute.
On commencement of the facility, the funder has agreed to advance cash at a 85% prepayment rate so will transfer a maximum of £85,000 to your Bank account.
Each invoice raised thereafter will be purchased by the funder and a further 85% of the invoice value made available to you.
When a customer pays an invoice, you will receive the balance of the invoice (i.e. invoice value less 85% already advanced, less any charges).
How will Invoice Discounting benefit my business?
- The cash released from the sales ledger can be utilised immediately to meet your day to day funding needs.
- You retain full control of your sales ledger management.
- The facility is normally undisclosed or confidential so your customers will not be aware of the funders involvement.
- Funding is secured on your sales invoices so financing is available from start up, up to more established businesses provided that robust management information can easily be demonstrated.
- Facilities are dynamic and can be tailored to your business needs rather than rigid like more traditional overdraft facilities.
- Increasingly, Invoice Discounting is used to facilitate further acquisitions, Management Buy-out/Buy-Ins.
- Some funders will offer additional services such as Bad Debt Protection, whereby for a premium, they will offer the option of including protection against bad debts. This will help protect future profits and cash flow.
What is the best solution for my business?
An invoice discounting facility is generally available to most UK businesses provided that the funder has all the relevant information available to them. Typically they will want to know about your invoice processing, any dilution issues that can affect the collection of the sales invoices and the financial performance of the business.
Our team are experts in arranging these facilities and will work with you to ensure that the funder fully understands your business, assist you with generating the information that will be required, help you with terminology and the negotiation of terms if required, and finally liaise between you and the funder to deliver a credit approved facility.
For further information on invoice discounting or any of our other products and services, please complete the Get A Quote, Contact Form or email email@example.com. Alternatively simply telephone our national rate number 0845 601 5343 or contact your local Harrisons office, details of which can be found within the Contact Us section.