Invoice Discounting
Want to improve your cash flow while managing your own credit control process? Invoice discounting helps you to confidentially access funds tied up in unpaid invoices to release working capital.
What Is Invoice Discounting?
Invoice Discounting, a form of Invoice Finance, allows businesses to unlock short-term working capital by selling outstanding invoices to a lender. Upon approval, lenders advance up to 90% of invoice value, providing immediate cash flow. With invoice discounting, businesses retain control over customer relationships and debt collection.
Other key information
- Costs: Finance company fees can range from 1-5% and is dependent on your industry, your invoice amounts and your customer payment history.
- Service fee: Services fees are generally cheaper than those for invoice factoring as there is no payment for credit management.
- Not regulated by the FCA: Invoice discounting is a form of short-term financing, rather than long-term borrowing. Securing funds is often more streamlined because it is not regulated by the FCA.
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How Does Invoice Discounting Work?
The invoice discounting process typically proceeds like this:
- Invoices from your company will be sent out to customers as per your regular, day-to-day operations.
- You will submit your chosen invoices to the lender who will approve you based on risk assessments of you and your customer.
- Upon approval and discussion of fees, you will be sent the pre-agreed proportion of the invoices- this is usually between 70% and 90% of the invoice total, depending on the lender.
- You will collect payments from your customers as normal and once they have paid the invoice total, the fees owed will be claimed by the lender; this in which you will take out of your final customer payment.
Example
We’ve given a working example below:
- You contact an invoice finance company who offers to pay 80% of invoices.
- A factoring rate of 3% per 30 days is agreed.
- You raise an invoice for £5,000 and submit it to the invoice discounting company. The finance company will then pay you the first instalment of £4,000.
- Once your customer pays the invoice in full, you pay the lender back, including (in this example) the 3% fee. The lender would receive the £4,000 back plus the fee of 3% of £4,000, which is £120.
What is the difference between invoice discounting and invoice factoring?
Both of these terms fall under the umbrella term of Invoice Financing. The main difference between the two is that invoice discounting allows you to control your own finances and payment collection, i.e. chasing customers, payments being made in your name and managing your own sales ledger.
Your customers won’t know that you are involved with a financial service- this maintenance of confidentiality is not applicable in invoice factoring as the customers, in that case, make payments to the factoring facility and not the business.
You and your business will be responsible for collecting payments from your customers, so are therefore responsible for repaying the lender when payments are due, regardless of what the customer has paid by that specified point.
Advantages of invoice discounting:
- Continue to manage your own credit control processes
- Maintain customer relationships yourself
- Entirely confidential so your customers won’t know you are financing invoices
Benefits of working with Hilton Smythe
- Market independence: Forget biased recommendations. We’re 100% independent financial advisers, free from funder or product restrictions. No commissions, no conflicts, just your best shot at financing tailored to your goals.
- Access to a wide panel of lenders: We source exclusive loan deals unavailable through traditional lenders, unlocking bespoke lending solutions that meet your specific needs.
- A leading SME finance specialist: We’ve been focused exclusively on SMEs since 2018, helping countless businesses reach their growth goals.
FAQ’s
What business can use invoice discounting?
When seeking approval from lenders, many factors are assessed. Some of these cannot be altered by the business, for example: customer payment history and credit rating.
If you are a smaller business without the time or resources to chase payments and deal with credit management, invoice factoring may be a better option for you.
How much does invoice discounting cost?
The range of fees from a financing company can vary from 1-5%. This depends on factors such as the industry your business is in, your invoice amounts and your customer payment history. An invoice discounting service is bespoke to an individual business, so a flat rate cannot be stated.
The two main costs are:
Service fee
This is for the service itself and is subject to be cheaper than invoice factoring as there is no payment for credit management.
Discount fee
This charge is not interest as it would be from a bank, but a fee more in relation to the cost of borrowing from the lender to cover the time taken between their payout and customer payment.
Is invoice discounting classed as a loan?
Invoice discounting is more short-term borrowing than a loan. It isn’t regulated by the FCA, so securing funds is often easier.