Invoice discounting is the simplest form of invoice finance. As with all types of invoice finance, with invoice discounting you sell your unpaid invoices to a lender and they give you a cash advance that is a percentage of the total invoice value. Effectively, you are leveraging the value of your sales ledger. Once the customer pays the invoice in full, the lender pays the remaining balance to you minus their fee. This provides an invaluable source of working capital throughout the month.

This type of invoice finance is very similar to invoice factoring. The main difference being that your customer is not be aware that you have taken on cashflow finance. You remain in control of the sales ledger, collecting payments as normal and sending out reminders. This allows you to maintain your own customer relationships, standards, and style of communication.

It is such a powerful way to release cash, as the finance is only against what you are owed, just consider it as a series of short-term business loans which use invoices as security. You are loaning against cash you technically have so the risks are low and the benefits high.

Unlike invoice factoring though you will still have to chase payments from your customers directly, which can be time consuming and challenging. Compare Your Funding works with hundreds of lenders across all types of finance and we can get you the right facility at the right price for your business.

• You sell goods or services to your customers as usual
• You then raise invoices for those goods or services and send them to your customers, and a copy to the funder
• The funder lends you the agreed percentage value of the raised invoices (typically 95% but can reach 100% in some cases) after verifying that the invoices are valid
• This frees up your cashflow so you pay bills, repay debt, or use as part of a long-term plan for growth
• Once you have received payment from your customers, you repay the loan to the invoice discounting company, plus an agreed fee to cover costs, risk and interest. The fee is usually between 1% and 3% of the invoice total
• In some cases, your customers might pay into a trust account in your business name but actually controlled by the invoice discounting company. This reduces the risk of non-payment by you to the lender yet maintains confidentiality.
• Sending out invoices immediately after work has completed is key to success with invoice discounting

It is ideal for businesses who face cashflow challenges or want to finance growth, as it fills the gap of up to 90-days between raising a customer invoice and being paid. By releasing that cash quickly, you can manage the day-to-day activities of your business and plan for growth with a sustainable cash flow that builds working capital.

Invoice discounting, like invoice factoring is flexible as it matches the performance of your business. Based on your invoices, this means you will not struggle with high fixed repayments as you would with a loan or credit card and, on the flip side, your funding won’t hold you back when your business growth accelerates.

With so many alternative finance options now available, it can be difficult to know which one is the most appropriate and if invoice discounting is right for you. Of course, our team at Compare Your Funding can advise as part of the free funding review we offer – in the meantime below is a simple checklist which may help. Invoice discounting is a good option if:

• Your customers generally pay on time
• You have effective and robust credit control procedures in place
• You have minimal bad debts
• Customers have a minimum 30-day payment term

If you know invoice financing is for you but are not sure whether to choose discounting or factoring, the key question is do you carry out credit management processes in-house. If not, invoice factoring may be more suitable.

Discounting services are generally more widely available to established businesses rather than start-ups which, by their nature, would not have reliable turnover and credit management processes.

financial/accounting side of discounting your invoices is just one area that you will need to think about.

For a relatively small cost your business will have regular cash flowing through it, with no payment delays which could cause any business to struggle.

• You retain control of customer relationships
• You can be confident when you will receive payments
• Payments are made quickly and on time
• It gives you the ability to plan and manage your costs / investments more effectively
• It makes a big difference to your cashflow, especially if you have clients who normally take a long time to pay
• Cashflow is vital to the health of your business so the better your cashflow, the more likely it is that your business will survive and thrive
• It is typically cheaper and simpler than applying for a bank loan and you are more likely to be approved

The money released regularly could be used by a business in all sorts of ways, from meeting seasonal resourcing demand through to expanding a product line or even simply getting you through each month.

Some companies prefer invoice discounting to invoice factoring because of its confidential nature. To your customer nothing changes, they will never know you are using a funding facility. This is why invoice discounting is sometimes called confidential invoice discounting.

You may need to think about the ability of your customer to make payment and what happens if they don’t. Part of the terms and conditions may also include ‘with recourse’. This means that the lender has the right to claim back money that your customer fails to pay. The alternative to this is ‘without recourse’ which would be beneficial if you have any doubts regarding your customers’ ability to pay in the long-term. You will pay a little more for discounting without recourse, as the agreement will include payment for a credit insurance policy.