Invoice discounting is a financing opportunity that allows business owners to leverage their sales ledger invoice. It is perhaps the simplest form of invoice-based financing. The idea is that you sell unpaid invoices to a lender in return for a cash advance as a percentage of the value of the invoices. At a later date, the invoices are paid by your customer(s). Then, the value of the advance is removed from the amount payable plus an additional fee from the lender as profit. Although it may sound complicated, it’s actually quite a simple technique used to free up cash when needed.
We’re going to have a look now at some of the key points concerning invoice discounting
Features and Benefits
- Invoice discounting is normally confidential
- 60% of British businesses struggle with cash-flow problems
- It’s not always possible to say how much money you can get advanced by doing this
- The two associated costs are the discount fee and the service fee
- Finding out if it works for you will take careful consideration of you own cash flow and business needs
- There has been a generally national increase in invoice financing and factoring from £9.4 million in 2011 to £12 million in 2018
How invoice discounting works
The best way to demonstrate this is with an example. Let’s imagine that an invoice for the value of £5,000 is issued for work that’s been done. There is an agreement that states that there is an advancement of 60% before invoice payment. This means that there is an initial £3,000 that can be advanced, and the remaining £2,000 can come at a later date when the invoice is finally cashed. Whilst such a solution is not always necessary, nor is it a good fit for everyone, in some circumstances it can be just what a business needs.
The History of Invoice Discounting
Invoice Discounting dates back as far as 4000 years ago, in the era of Mesopotamia. It continued on through the Babylonian and Roman empires too, so it is no new form of financing. At that time, people would sell promissory notes to get themselves discounts. In England, it has existed in some form since at least the 1400s. The technique was associated with merchant banking activities which were prevalent at the time. They evolved with the non-trade related financing that crept into the market due to continued technological and social developments.
For many people, invoice discounting will be a term they have not heard before. But depending on your business, you may find that it’s a form of financing that may well suit you. If you are in a position where you receive high-value or frequent invoices, but the date of payment is unreliable, invoice discounting can tie you over if you can guarantee you’ll receive funds soon after. It is not a resource you use unwisely, as if customers start not paying invoices in a timely manner, or even if you have trouble getting the money at all, you can put your business at risk. This is especially true if the value of the invoices in question are high value and you need a large invoice discount to keep going.