Basic Considerations When Choosing an Invoice Discounting Supplier

Invoice discounting is a specialist finance facility for businesses with large turnovers whereby your company receives a generous percentage of the value of your sales invoices and the balance, less interest and fees, when the client settles their invoice.

Your company could receive up to 85% of the total value of the sales invoices you’ve raised. The balance, less charges, is paid to you when your clients pays their invoice in full. This method of finance is similar to business factoring except that your company still collects the debt and maintains the client relationship. This is particularly important to companies with an established relationship with their clients and whose corporate image might be damaged by a third party chasing for payment. The fees charged include interest on the money advanced to your business and variable charges. Your sales ledger is likely to be your company’s greatest asset and using invoice discounting will improve your cashflow. The invoice discounting facility is typically made available to businesses turning over £500,000+ but there are invoice financing providers who will help you to find the best solution for your company whatever your turnover.

Whatever arrangement you agree, check any contract that you sign and be prepared to share your track record on debt collection and the credit control procedures you have in place to ensure that your debts are recovered quickly from clients. Your clients will not know that your credit control function has been outsourced as you retain the relationship with them which is a key difference from invoice factoring.

How to choose the right invoice discounter?

What is their application procedure and what will be required of your organisation?

  • What fees will they charge? Remember to ask about interest rates for sums loaned as well as management fees
  • What is their track record for collecting debts quickly and efficiently; do they have a robust credit control procedure?
  • How will the invoice discounting company maintain a good relationship with your clients?
  • Is the invoice discounting company experienced in your market sector?<
  • What period of notice do you need to give the invoice discounting company? Accepting that this is a long-term commitment.
  • Are they UK-based?

If you consider the benefits and the drawbacks carefully and seek professional advice, invoice discounting can increase your working capital and bridge the gap between raising and settlement of an invoice so that your business enjoys a consistent cashflow.

What are the costs?

There are usually two forms of fee; you will pay interest on the money loaned to you until the client settles their debt. The interest charged varies from between 1% and 3% above the Bank of England base rate depending on your finance provider. You are also likely to be charged a management fee of approximately 1%.

Key benefits

  • You have peace of mind that within approximately 24 hours of presenting your sales invoice to the factoring company, roughly 80% of its value will be in your bank account
  • Managing your debtors becomes easier, you do not have to chase debt and you are no longer at the mercy of clients who pay late
  • You can concentrate on your core business
  • Invoices presented to a factoring company will get paid sooner than by the client
  • It is a flexible form of finance and as your business drives more sales, you can realize returns quickly and efficiently
  • This arrangement is confidential so your clients are unaware that you are borrowing against the value of their invoices
  • You manage your clients’ accounts and retain a close working relationship