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What is Invoice Discounting?

Invoice discounting is a form of debtor finance. It helps companies that have cash flow problems because customers are paying invoices in 30 to 90 days. Offering payment terms is expected when working with larger commercial and industrial customers.

However, allowing customers to pay in 30 to 90 days can affect your cash flow if your financial reserves are not sufficient to pay for corporate expenses. This scenario can happen if you are trying to turn around the company, or if you are growing too quickly.  Discounting your invoices allows you to improve your cash flow and positions your company for future growth.

Finance your receivables ledger

Invoice discounting enables you to finance your slow-paying invoices. It solves the immediate cash flow problem by providing you with funds. You can use these funds to pay for company expenses, or you can invest them in new growth opportunities.

The invoice discount line works as a revolving financing facility. The finance company advances a percentage of your ledger and deposits the funds to your bank account. The percentage advanced varies but it averages 80% – 85% of the eligible ledger. The financing line is adjusted regularly, as your customers pay old invoices and as you raise new invoices.

Grow your business

Discounting invoices can be used as a tool to grow your business, especially if you are unable to offer payment terms to new customers. With a financing line in place, you can sign on new clients and start financing their invoices immediately. This solution optimizes your cash flow and enables you to pay the associated business expenses.

One important advantage of invoice discounting is that the line can increase as your sales grow. This feature is important for companies that are growing quickly and whose financing needs are constantly evolving.

Easier to get than bank financing

Invoice discounting is easier to obtain than conventional bank financing, especially lines of credit and overdraft facilities. Companies that meet these criteria can usually qualify for funding:

  • Work with commercial clients that have good commercial credit
  • Cannot afford to wait 30 to 90 days to get paid by clients
  • Need funds to pay business expenses
  • Do not have accounts receivable pledged as security
  • Do not have serious financial or legal problems

Differences with invoice factoring

Factoring and invoice discounting offer similar benefits. However, the products are very different and are designed to help different types of clients.

One important difference between the products is client size. Invoice factoring is offered to smaller companies that need additional credit management and collections services. Invoice discounting, on the other hand, is offered as a funding-only solution to more established companies that have larger turnovers.

The services also differ in how the invoices are actually financed. Invoice discount facilities finance the ledger as a whole. Individual invoices are not ledgered or tracked. Therefore, the client must handle its own collections and payment reconciliation.

Factoring facilities finance and track individual invoices even if the whole ledger is financed. Often, the financier helps client with credit and collection activities as well. This assistance makes factoring a better choice for smaller companies.

Need invoice discounting?

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