Invoice discounting is a practice by which a business can receive an advance on a selection of invoices from a third-party company. It’s a way to accelerate cash flow, so that instead of waiting for customers to pay within their usual credit terms, a business can receive the cash almost as soon as the invoice is issued.
This form of borrowing allows businesses to increase their working capital, keep their current operations unaltered and maintain close relationships with customers, all whilst the business is primed for opportunity and growth.
Invoice discounting falls under the umbrella term ‘invoice finance’ but should not be confused with invoice factoring. In this post, we will discuss the key differences between invoice discounting and invoice factoring, take a more in-depth look at how invoice discounting works, as well as the advantages and disadvantages of this kind of service.
Invoice Factoring and Invoice Discounting
Fundamentally, both invoice factoring and invoice discounting are used to prevent slow paying customers from affecting cash flow. For SMEs in particular, having to wait up to 120 days for an invoice to be settled can put a serious strain on a company’s cash flow, and that’s assuming it’s even paid on time. Even a 30-day invoice could hold a business back from being able to invest in a new project or begin working on their next order.
Both invoice factoring and invoice discounting release funds tied up in unpaid invoices. A provider will agree to advance the money against outstanding debtor balances. The difference between the two lies in who takes control of the sales ledger and the responsibility of collecting payments.
With invoice factoring, the provider takes on this role, including chasing customers for settlement of their invoices. With invoice discounting, the business itself retains this control and chases payments in their usual way.
Choosing between the two will depend on the size of your company and if you already have an established infrastructure and resources in place to manage invoice tracking and acquisition. If you already have an established sales ledger process tailored to chase customer payments, invoice discounting will be the more suitable service of the two for your business.
How Does Invoice Discounting Work?
As with all types of invoice finance, with invoice discounting you sell unpaid invoices to a lender and they will give you a cash advance that is a percentage of the invoice’s value. Once the invoice has been paid by the customer, the lender pays the remaining balance minus any agreed upon interest and service fees.
The percentage of the invoice received as the advance can be as high as 90% depending on your business sector, proof of debts and/or contracts with customers. With an invoice discounting facility, there are generally three options:
- Whole turnover agreements – a facility purchases every invoice.
- Selective invoice discounting – a business can choose to sell specific invoices based on customers.
- Spot invoice discounting – where only certain invoices or a single invoice is sold.
In all three cases, any advanced invoices are generally issued within 24 hours from the discounting facility. This is a discounted amount of the original invoice, hence the term ‘invoice discounting’. This kind of service effectively allows businesses to bridge funding gaps whilst they wait for customer payments to come through.
Why Use Invoice Discounting?
As with all kinds of financial services, invoice discounting comes with its own set of advantages and considerations.
- It’s the less intrusive option of invoice financing, as you continue to use your own well-established infrastructure to manage your sales ledger and customer invoices.
- You will be provided with a continual and ongoing cash flow. Once the service is set up, an advance of each invoice is given to you within 24 hours of them being assigned.
- If you don’t have a great credit score, you will generally have a greater chance of acquiring an invoice discounting facility, compared to a loan, as a funding option.
- Your customers do not need to be made aware that their invoices have been used alongside this service; you can choose to keep it confidential.
- Unlike a business loan, there are no restrictions on how you may spend the advance.
- With an increased working capital, you can continue business operations as normal, and will be able to grow your business.
- Your invoice financing company will not run a shadow sales ledger; it may therefore be necessary to compile a month-end report to detail the movements on your sales ledger to keep your financing facility informed.
- Invoice discounting is a funds-only arrangement and because of this, there is an implied level of trust between the invoice discounting company and you. Therefore, not all businesses will qualify for this service.
- Your invoice financing company will not be responsible for credit control or ensuring customer payment. If this kind of service interests you, an invoice factoring service may be a better solution.
- If you sign up to a facility, the service fee is the same regardless of the invoice value.
- It is a good option to acquire bad debt protection or credit insurance as an additional product, protecting your business in the unlikely event your customers do not pay their invoices.
Secure Invoice Discounting with Ping Finance
If invoice discounting seems to fit your business, Ping Finance can help. We offer invoice discounting in Manchester and Bolton; we assess your business and your business needs and use our contacts with hundreds of lenders from across the UK to find the right deal for you. Our service is straightforward, and we offer simple solutions to growing businesses, helping you secure the funding you need.
However, if you would only like to use invoice discounting for a one-off invoice or for a specific customer, our selective financing services may be the best invoice finance option for you. Simply fill out our online enquiry form with a few details, and a member of our friendly advise team will be on hand to answer any of your questions and guide you through the process.