Invoice discounting allows you to access funds in your receivable accounts ledger (unpaid client invoices) considerably more quickly. You seek out a brief loan from an invoice discounting provider instead of waiting for your clients to pay your invoices. These businesses will loan you up to 95% of the invoice value, paying you in days instead of weeks. You repay the loan whenever you receive money from your consumers.
Invoice discounting is a way of financing invoices. It differs from invoice factoring in various aspects, the most notable of which being confidentiality. Your consumers will never know you use invoice discounting services, however invoice factoring is more difficult to conceal.
What is invoice discounting and how does it work?
Discounting invoices is similar to having an overdraft or a number of quick loans secured against your receivable accounts ledger. The following is how it works:
As is customary, you sell your consumers items or services.
You create and send invoices to your customers for those products or services.
After establishing that the invoices are valid, an invoice discounting provider gives you the value of the raised bills, less a tiny percentage.
Your clients pay you as per your standard payment terms (chasing late invoice payments is your job – you stay the credit controller).
Once your customers have paid you, you refund the invoice discounting provider the loan plus an agreed-upon charge to cover costs, risk, as well as interest. The cost is normally between 1% and 3% of the entire invoice amount.
In other situations, your clients may deposit funds into a trust account set up in your company’s name but managed by the invoice discounting firm. This decreases the chance of you not paying the lender while maintaining your privacy.
Discounting of confidential invoices
Because invoice discounting is more secret than invoice factoring, some businesses prefer it. Your customers don’t need to know you’re to use an invoice discounting service. Because of this, invoice discounting is often known as “secret invoice discounting.” It is also feasible to have confidential invoice factoring, but this is less common and more difficult.
How to Make Invoice Discounting Work for You
The first stage is to decide whether or not you wish to discount your entire trade receivables 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. Because invoice discounting firms prefer to distribute their risk as extensively as possible, this is the case.
Then, get in touch with a few invoice discounting companies and evaluate 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. Before making a final decision, consult with your accountant.