Invoice discounting allows you to access funds in your ledger’s accounts receivable (unpaid client invoices) more quickly. You take out a short-term loan from an invoice discounting provider instead of waiting for your clients to pay your invoices. These companies will lend you up to 95% of the invoice value, paying you in days rather than weeks. You repay the loan whenever you receive money from your consumers.
How does invoice discounting work?
Invoices discounting is similar to having an overdraft or a series of short-term loans secured against your accounts receivable ledger. This is how it works:
- You sell your customers’ goods or services.
- You create and send invoices to your customers for those goods or services.
- After checking that the invoices are valid, an invoice discounting provider lends you the value of the raised bills, minus a tiny percentage.
- Your customers pay you according to your standard payment terms (chasing late invoice payments is your job – you remain the credit controller).
- Once your clients have paid you, you refund the invoice discounting company the loan plus an agreed-upon charge to cover costs, risk, and interest. The cost is normally between 1% and 3% of the entire invoice amount.
- In some situations, your clients may deposit funds into a trust account in your company’s name, but which is managed by the invoice discounting firm. This decreases the chance of you not paying the loan while maintaining your privacy.
Potential advantages of invoice discounting
When you use invoice discounting, you get a cash payment – for a major fraction of the amount owing – as soon as the invoice is sent out. Let’s take a look at some of the benefits of invoice discounting.
Eliminate the burden of collecting money
Most business owners are well aware of how difficult it can be to convince debtors to pay their bills on time. You can outsource invoice collection to your finance provider if you get into an invoice discounting agreement, saving you time and allowing you to focus on running your business.
The money can be spent on anything
Invoice discounting payments can be utilized for practically any business purpose, including boosting working capital, decreasing debts, supporting expansion, hiring new employees, and purchasing stock and equipment.
Lower your company’s risk
If one customer is late in paying a large invoice, it can have a considerable influence on the entire health of the business, especially for smaller enterprises. You can ensure that you receive the majority of the invoice’s value right away by using invoice discounting.
There’s no requirement for your clients to be aware
You are not required by law to inform your clients that you have entered into an invoice discounting agreement.
Make your payments more quickly
Because of the cash flow benefits that invoice discounting provides, you should be able to meet your repayment commitments more quickly, whether they be loan repayments or invoices. You might be able to get discounts for paying your bills early if you settle them faster.
Obtain debt protection from bad debts
It’s possible to get “non-recourse” invoice discount financing, which means the lender takes full responsibility for any unpaid invoices. This implies that if a customer fails to pay in full, you will still receive the whole amount due to you, minus the lender’s customary cost.
How to implement invoice discounting?
The first stage is to decide whether or not you wish to discount your entire accounts receivable ledger, a process known as whole turnover invoice discounting. Selective invoice discounting, on the other hand, allows you to discount only a few specified invoices. Keep in mind that selective invoice discounting is not always available for small firms.
Then, get in touch with a few invoices discounting companies and compare their services and rates. Request references from their consumers if at all possible. In most circumstances, these will be anonymous, but they may still be valuable in determining which company to utilize. Consult your accountant before making a final decision; they may be able to provide guidance.
The invoice discounting firm chosen by you will walk you through the procedure once you’ve tied up. This includes setting up payments to you, establishing a trust account for customer payments (if necessary), and integrating with your invoicing process to ensure that you get paid as soon as feasible. If you’re utilizing cloud-based invoicing software, you can usually do most or all of this online.