Invoice Discounting | A guide to how invoice discounting works

In today’s economic climate it is extremely common for businesses to feel the pinch and as they do more and more businesses are putting off paying invoices until they really have to. This creates a knock on effect to the businesses who issue the invoice as they their cash flow is compromised.

According to statistics from Experian credit rating group, in the third quarter of 2010, UK businesses were paying their invoices 22.6 days late on average. For some businesses this may cause a significant cash flow problem and this is where invoice discounting steps in.

Invoice Discounting is a form of borrowing which is secured against the outstanding invoice(s). The invoice is used as collateral and normally up to 80% of the total invoice(s) total is offered as an advance or loan in return for a monthly fee and ongoing interest. Initially, invoice discounting appears to be very similar to Factoring but there are some important differences between the two products which should be considered.

The main difference between the two products, invoice discounting and factoring is the control and responsibility of collecting the outstanding monies. Factoring can often mean that the collection of the money owing on the invoice is handed over to the factor whereas all the responsibility and control remains with the business when using an invoice discounting service. Retaining control over its invoices is often viewed as desirable for the business instead of customers knowing that there is a third party involved.

Most finance companies and many large banks offer invoice discounting and many will make funds available as soon as 24hours after the application has been accepted.

Invoice discounting can be ongoing. As the business raise more invoices the amount of funds available from the invoice discounter increases, always remaining at the agreed limit of usually 80% of outstanding invoices. Each time an invoice is created or paid the amount of advance is recalculated to ensure the advanced amount never exceeds this agreed limit.

Usually there is a monthly fee which is charged in addition to ongoing interest on the amount advanced from the invoice discounting company. Charges for this service are commonly higher than those associated with a business bank loan but invoice discounting can be a successful tool if used correctly in the short term. It provides funds quickly and allows the business to retain full control over their invoices and the collection of them.

How Invoice Discounting Works