Business financing simplified
in a nutshell
Invoice discounting is an invoice finance product that allows you to borrow funds against your entire sales ledger. Usually, a business will be able to borrow up to 90% of the outstanding invoice value. In invoice discounting does not include credit control as part of the service. As such, the most common form of invoice discounting is Confidential Invoice Discounting (CID), which is where the funder sits behind, and funds against the sales ledger confidentially from the end debtor. Invoice discounting facilities can also have the lender disclosed to the end debtor, although mainly this happens in cases where the business is liable to disputes or claw-backs (eg construction).
With all forms of Invoice Discounting, the borrower will need to re-divert customer payments to the lender’s trust account (in the borrower’s name). Unlike Factoring, where the lender gets involved in collections, the customers and clients just keep paying as normal and in CID, do not know the lender is involved.
A working example; Company A is set up with an Invoice discounting facility (confidential) – they have £250,000 in outstanding invoices and have a drawdown % of 85%. They can therefore access £212,500 of cash on these invoices. When an invoice is paid (eg £50k), the amount drawn goes down to £162,500 on invoices outstanding of £200,000, therefore, the company has drawn 81.25% of eligible receivables, and has the ability to draw another £7,500. The same process when a new invoice is raised (eg £50k), then an additional £42,500 is available to draw down.
The security required depends on the lender but as a general rule, you will need to offer at least first charge debenture on your accounts receivable, and it is likely to be a sort of guarantee, either a personal guarantee or a form of anti-fraud indemnity.