Invoice discounting is a means of increasing working capital by “selling” a company’s outstanding sales invoices to an invoice finance company as and when they are raised in return for an immediate payment of a pre-agreed percentage of the invoice value.
Unlike factoring where the factoring companies also maintain the sales ledger and carries out the credit control, with invoice discounting the company continues to maintain it’s own sales ledger and handles it’s own credit control. Additionally it is confidential as there is no notification on the invoice that the debt has been assigned to the invoice discounting company so the customer is unaware of the arrangement.
In practice the discounting company will advance up to 85% of the invoice value (including vat) as and when the invoices are raised with the balance of 15% being paid over when the customer has paid the debt.
Invoice discounting is suitable for most companies that sell a product or provide a service and is more effective for companies who’s major asset are the trade debts due to them as banks are no longer interested in offering overdraft facilities to this type of company, especially if the company is newly established.
Although supposedly straight forward there are alarming differences between the different invoice discounting facilities between one invoice finance company and another as whilst most claim to offer an efficient and personal service very often the reverse is true with the lack of flexibility strangling the life out of their client and the levels of funding never reaching the agreed levels thanks to a range of excuses used to keep funding as low as possible.
We have offered some guidance about the potential pitfalls of invoice discounting including chapters on the poor service offered by some invoice finance companies, how and why they keep the funding levels as low as possible and why the quoted rates may not be as straight forward it it may appear.
Invoice Discounting UK
5 Torridge, Hockley, Tamworth, Staffordshire B77 5QL
Tel: 01827 707680