Invoice Discounting (sometimes also known as Confidential Invoice Discounting or CID) is a non-disclosed facility, meaning that your business’ clients are unaware that you use the facility. You continue to handle your credit control in house, and deal directly with your clients regarding invoices and collection. When compared to invoice factoring – where the factoring agent deals with the client invoices directly – there is much more trust. Therefore, it is usually reserved for larger businesses, or ones that have been operating for longer.
What is Invoice Discounting?
Invoice Discounting is the most simple and popular form of Invoice Finance, offering a way to release cash tied up in your outstanding invoices (also known as the businesses debtor book). More simply put, it allows you to advance against money owed to you in the future, and is a popular alternative to an overdraft facility, widely used by businesses.
The main advantage of Invoice Discounting is the ability to borrow up to 95% of the outstanding invoices to customers, providing immediate and crucial cashflow for your business. Most Invoice Discounting facilities are provided on a Confidential basis, meaning that you do not have to disclose to your clients that you are using the facility.
Invoice discounting vs factoring
Both invoice discounting and factoring are types of invoice finance. So, invoice discounting companies will often offer you both types. When it comes to choosing invoice discounting for UK businesses there is a clear choice between who contacts your customers and controls the invoice collection process.
With invoice discounting, you, as the business owner continue to contact your clients and control credit collection. Any debtors you will need to follow up and ensure you receive payment from. Therefore, the invoice discounting company is trusting that you will collect the invoices they finance for you.
| Invoice discounting | Invoice factoring | |
|---|---|---|
| Cash released in 24 hours | Yes | Yes |
| Up to 95% upfront | Yes | Yes |
| Finance company contacts debtors | No | Yes |
| Business owner contacts debtor | Yes | No |
| All your invoices discounted | Yes | Yes |
With invoice factoring, link you hand over the duty for collection of the invoices to the factoring agency. They deal directly with your clients, collect invoices on your behalf, and pay you the balance on receipt after any agreed fees or costs.
Invoice discounting example
So, if you have wondered How does Invoicing Discounting Work, let us explain it as clearly as we can. It can really help your business if your debtors are not paying quickly enough or are not paying on time!
For example, if you set up an invoice discounting facility with a UK factoring company, and agree to handle your credit control in house, the process would be something like this:
- You raise your invoices with your clients. E.g. Total Invoice value £20,000, with 60 days term
- Invoice discounting company pays you up front 95%. So, on day 1 you receive £19,000
- You can use the cash to invest in your business, pay for day-to-day expenses or whatever you need the cashflow for.
- You continue to contact your client for payment of the invoice
- On payment of the invoices you pay the invoice finance company the £19,000 back, plus any agreed fees
Invoice discounting advantages and disadvantages
Advantages
Receive up to 95% of your sales invoice
You can unlock cash tied up within your business to support your working capital cycle and fund your growth ambitions. If you have large invoices that you are waiting to be paid on, then by discounting the invoices you can access that cash more quickly.
Quick funding within 24 hours of invoice
With Invoice Discounting, approval is quick and easy. In most cases you can draw down funds against your invoices within 24 hours
Utilise the value in your debtor book
Unlike other financial borrowings you take, you don’t need to have collateral to get money with invoice discounting. Your invoice is all you need. It is especially beneficial for small businesses with few assets to show as collateral.
Invoice Discounting allows you to borrow against the security of your debtor book and often allows you to avoid pledging personal security or other business assets often required to secure an overdraft facility
A facility that grows with you
As your business grows, an Invoice Discounting facility typically grows with you, helping to smooth out cash flow hurdles that often hinder businesses without this facility. Most financing companies can come up with flexible plans to adapt to your business needs regardless of whether you are a small or big business.
It doesn’t affect your credit rating
As invoice discounting is not a loan, it will not affect your standing with lenders. Unlike a loan, there are no interest payments or long-term repayment schedules.
Using Invoice Discounting As An Investment Option
Investments are an integral part of your financial planning as they help make your business financially secure into the future. Investing in invoice discounting is becoming popular these days due to shorter investment periods and better returns.
Short-term investment
One of the reasons you should consider investing in invoice discounting is that it is short-term, at most one or two months. It is because most invoices have a tenure of 15-90 days. It ensures that your money isn’t locked for an extended period, giving you more financial flexibility. You can get the money quickly in case you need it for emergencies.
Your investments remain safe
Contrary to traditional loans, where there is a risk of event execution, you are investing in something that has already happened – you have already completed the work and raised the invoice. Most invoice discounting platforms are digital and ensure the invoice is from credible sources, so there is minimal risk in investing. The factoring companies also take various measures to reduce investors’ risk.
High returns
Another benefit of investing in invoice discounting is that you get higher returns than other investment options. It is seen that invoice discounting gives almost 10-20% more returns than traditional investments such as Fixed deposits and recurring deposits. Unlike the conventional investment, which takes years to achieve high returns, invoice discounting investment is safer and quicker with better returns.
Hassle-free investing process
Another benefit of invoice discounting investment is that you can do it through reliable digital platforms that make the entire process easier. You don’t have to worry about running on multiple investment platforms. You can easily invest, monitor, and redeem all from one platform.
Create a diversified portfolio
If you invest to generate wealth in the long haul, you realize the importance of having a diversified portfolio. A diversified portfolio has a good mix of short-term, long-term, high-risk and low-risk, liquid and non-liquid investments. Adding invoice discounting to your portfolio can help you make your portfolio more diversified and beneficial for you.
Invoice discounting is not dependent on the market
There is always a certain amount of risk in investing your money. However, invoice discounting investment isn’t subject to market changes, so your money is much safer with invoice discounting. You don’t have to worry about losses due to market falls.
Disadvantages
Obviously, cost is the main disadvantage when it comes to invoice discounting. However, the benefits to your business can usually offset the costs. As you are able to take advantage of opportunities or manage your working capital better to drive your business forward.
What are the Invoice Discounting Costs
Invoice Discounting costs vary from business to business but are broadly split into the following categories
Arrangement Fee / Survey Cost
Some lenders will charge a fee to carry out due diligence, known as a survey and there may also be an arrangement fee, which is the cost of setting up the facility. Some will also charge a small annual renewal fee thereafter.
Service Fee
The Invoice Discounting Costs include a service fee for the day to day administration of the facility, usually charged as a percentage of the gross invoice value but sometimes this can be a pre-agreed fixed monthly amount. When this is charged as a percentage, there is often a minimum monthly charge agreed at the outset.
Discount Fee
This is calculated as a percentage of the total funds you borrow.
Ancillary costs
Some invoice finance companies will charge additional ancillary fees, which can include CHAPS payment charges for when you need to draw down funds on the same day.
Is Invoice Discounting Right for your Business?
Invoice Discounting is a viable funding solution for many business, but how do you know if it is the right solution for your business?
Firstly, Invoice Discounting is only suitable for businesses that sell to other businesses and cannot be used to fund invoices to private individuals.
If your business is growing, either organically or by acquisition, there is a good chance Invoice Discounting could be a great solution but it can also work well for businesses in difficulty, or those that are looking to avoid raising debt that will lead to costly monthly repayments.
Although invoice discounting and factoring are similar invoice financing options, there is a significant difference between these borrowing methods. With invoice factoring, the third party or the factoring company takes care of the sales ledger, credit control, and debt collections. However, with invoice discounting, you must take care of all these responsibilities.
To find out whether invoice discounting or invoice factoring are right for you, apply today for a free invoice finance quote and free consultation.
