Many companies have benefitted from having invoice discounting arrangements in place, but it’s also important to recognize that this type of arrangement might not be suitable for everyone.
Some of the potential issues with invoice discounting include:
- It is only available on commercial invoices, i.e., those issued to other businesses. You can’t use it on invoices issued to ordinary customers, meaning that this type of arrangement won’t be suitable for some types of business
- If you have only been trading for a short period, or only have a small turnover, you might find it harder to obtain an invoice discounting facility. Some providers might refuse you altogether, while others might charge higher fees
- You might not be able to access sufficient funding via invoice discounting, and if you are looking to borrow a specified sum, or you want to acquire new machinery or equipment, a business loan or other arrangement may be more suitable
- The total cost can be higher than for overdrafts and other forms of business borrowing
- Taking out an invoice discounting arrangement could make it harder to obtain business loans and other forms of finance
- Your profits will be affected for as long as the invoice discounting arrangement remains in place, as the lender will take a proportion of every invoice amount as a fee
- You retain responsibility for chasing up each customer when they don’t settle the invoice promptly
- Unless you choose a (potentially expensive) option known as non-recourse invoice finance, you still have to bear the risk that some customers might never settle their invoices
- It can be difficult to exit an invoice discounting arrangement, as you would suddenly have to re-adjust to a situation where payment terms on invoices were uncertain, and this could cause cash flow issues
How does it work?
When you issue an invoice to a business customer, the invoice discounting provider advances you funds to cover a proportion of the invoice’s value, perhaps between 70% and 95% of the invoice amount. When your customer settles the invoice, you receive the remainder of the payment, less an amount – maybe between 1.5% and 5% of the invoice value – which the lender retains as a fee.
Why might you benefit from invoice discounting?
On the other hand, there are reasons why entering into an invoice discounting arrangement could be good for your business. These might include:
- It can help considerably with cash flow management. Without any form of invoice finance in place, you don’t know when your customer will settle an invoice – some might pay immediately, while others could take several weeks to pay up, or even never pay. With invoice discounting, you know that you will receive a significant payment as soon as the invoice is issued
- As cash flow is more predictable with invoice discounting in place, it might make it easier for you to pay your own bills on time
- It’s a form of financing that grows with your business, so if the total value of your issued invoices doubles, so does the amount you receive from the finance provider
- With invoice discounting, your customers shouldn’t be able to find out that you have an arrangement of this type in place
- The unpaid invoice is the security for the financing, so there is no need to provide another business asset as security
- It can be a very speedy form of financing, with the arrangement taking a few weeks to set up initially. Many providers then release funds to you within 24 hours of an invoice being issued
- It’s available to businesses from many different sectors, and is also available to sole traders, partnerships and limited companies alike
- Businesses / business owners with poor credit records can still get invoice finance, in most cases
Here at Funding Bay, we have access to many different invoice discounting providers, but we can also arrange another form of finance, known as factoring. We can also offer a number of other forms of business finance.
Get in touch with us at Funding Bay for your financing needs.
Check out our invoice finance calculator here.
