Invoice discounting is best suited to SMEs that are selling business-to-business on credit terms and where you issue invoices to your customers in arrears.
You should complete the job as usual and send the invoice to your customer. At this point, you would notify your invoice discounting company and they would advance a percentage of the invoice value e.g. 85% within 24 hours.
Here’s the main difference to invoice factoring: when the invoice is due for payment, you will contact your customer to ask for payment. Your customer will pay into a trust bank account which is in your name but operated by the factoring company.
Once your customer has paid the invoice, the initial advance will be repaid and the invoice discounting company will take their fees, then the remaining balance e.g. 15% will be made available to you.
Most invoice discounting facilities are confidential hence the term confidential invoice discounting which you may have heard. This means your customers aren’t aware that a lender is involved in the background.
How much does it cost?
There are two main fees with invoice discounting: the service fee and the discount rate.
The service fee is charged as a percentage e.g. 1% of every invoice that you assign to an invoice discounting company. The rate itself is linked to several factors but one of the major ones is turnover; generally, higher turnover will command a lower service fee. On a like for like basis, invoice discounting tends to attract a lower service fee than invoice factoring as the lender isn’t undertaking credit control.
The discount rate should be viewed as an interest rate and it is charged based on the amount borrowed. For example, 3% over base rate on the balance. Again, the rate itself is linked to several risk associated factors.
There may be other fees associated with setting an invoice discounting facility up such as the arrangement fee, which is usually a percentage of the funding limit, and a survey or audit fee for the lender’s due diligence. Because the lender is less involved in this type of funding versus invoice factoring, there’s likely to be a regular requirement for audits so they can monitor your situation.
The Benefits of Confidential Invoice Discounting in Manchester & Bolton
The main benefit to invoice discounting is the impact it will have on your cashflow. Rather than waiting for your customers to pay and having to make awkward phone calls chasing payment, the funds will already be in your bank account which you could use to pay your suppliers earlier in return for an early settlement discount, for example.
With a confidential invoice discounting facility, your customers won’t know that a lender is involved; whilst this isn’t usually an issue, some businesses prefer to keep this information private. As you will be responsible for credit control, you will still be speaking to your customers on a regular basis and nourishing those relationships.
Having a funding partner can also help to de-risk your business. The invoice finance company will carry out due diligence on your current customers and any potential customers to make sure they are creditworthy.
- Funding based on outstanding invoices
- Advance of up to 90% available
- Funds available within 24 hours after invoice raised
- Retain control of your customer relationships
- Working capital finance solution
- Disclosed and confidential options
- Bad Debt Protection is available
What should I do next?
At Ping Finance, we offer confidential well-informed advice in invoice discounting. It takes just a few minutes to enter your details, so click “Let’s talk” below to arrange a call back and find out how our invoice discounting service can fit with your business. Alternatively, you can reach us on 0330 058 2330. Our offices are based in Bolton, Greater Manchester.