Invoice finance is a popular form of finance, designed to help businesses overcome the issue of late payment and boost cash flow.
There are many variations under the umbrella of invoice finance. The two prominent options are invoice discounting and invoice factoring. Discounting allows you to retain control of your sales ledger and maintain confidentiality, while factoring sees the lender seek customer repayments on your behalf.
However, you may also hear the term ‘disclosed invoice discounting’, which differs slightly from typical invoice discounting. We have examined it in further detail below, including how it works.
- What is disclosed invoice discounting?
- Why do lenders want you to disclose the discounting facility?
- How does disclosed invoice discounting differ from factoring?
- The benefits
- Considerations
What is disclosed invoice discounting?
Disclosed invoice discounting differs from traditional discounting, which is typically undisclosed.
You will still receive funding, but the invoices will be assigned to the lender rather than your company. Any invoices you send will make it clear that the payment is being sent to a third party, meaning your customers are aware. In this sense, it operates like a factoring agreement. However, payment and credit control remains with you.
Why do lenders want you to disclose the discounting facility?
If you seek invoice discounting, there may be cases where the lender insists on adding a ‘disclosed’ clause to any agreement. This typically boils down to the risk factor, as the lender is reliant firstly on your customers to pay you and then on you to pay them.
If you have a substantial turnover, a lender might be more willing to work with you on an undisclosed basis. Some won’t offer a choice at all. However, it is typical for discounting to be disclosed, particularly for smaller businesses with smaller annual turnover.
How does disclosed invoice discounting differ from factoring?
It is easy to assume disclosed discounting is the same as invoice factoring, given neither is confidential and both see customer payments go to the lender. However, there are some crucial differences.
The lender usually takes control of chasing customer payments in a factoring arrangement. In a disclosed discounting agreement, this will continue to be your duty, and you maintain ownership of your sales ledger and credit control practices.
A disclosed discounting facility is more likely to be a recourse arrangement, where you are liable for the debt if your customer fails to pay. However, you should check the loan terms to verify if this is the case.
The benefits
There are some advantages associated with using disclosed invoice discounting.
The most prominent is the release of capital which minimises cash flow blockages and allows you to operate without interruption. The money released from your invoices may be used anywhere, including fuelling growth strategies.
It will offer consistent cash flow, with a facility providing funding for every invoice you send per the loan’s agreed terms.
Disclosed invoice discounting also enables you to retain control of your sales ledger, meaning you handle your customers the same way you always have, avoiding potential reputational and relationship damage. This is rather than having a third party intervene, who could utilise different tactics or cause inconsistent experiences for customers.
You will not need to repay the lender as customer payment should automatically go to them, making the process simpler and faster. The only exception will be if your customer fails to pay and you are called upon to clear the balance.
Finally, there are benefits to disclosing your use of invoice finance. If there aren’t specific reasons for confidentiality, telling your customers will make the payment path transparent and avoid miscommunication. Your customers might even appreciate you being open with them.
Considerations
If you are considering disclosed invoice discounting, there are some factors to be aware of before deciding if it’s the right fit for your business.
Firstly, a disclosed facility is often more expensive than an undisclosed one. As the payment goes to the lender, there will be a certain level of administrative fees associated with the funding, which you will need to cover. This is on top of you potentially being liable for any shortfalls or it reducing the amount you have available to drawdown if your customers fail to repay their invoices.
Next, your customers will know you use a third-party lender to manage your invoices. Sometimes, this could lead to concerns about your financial stability or confusion when they must pay someone other than your business. You will need a good communications strategy to overcome this and divert any concerns.
Finally, you will be responsible for chasing invoices. Some people choose a factoring facility precisely to transfer this duty elsewhere, as it can be a significant drain on time and energy. You must do this effectively through strong credit management procedures, so the lender is repaid without you having to fund any shortfalls or reducing your amount.
Accessing invoice finance
Disclosed invoice discounting is one of many invoice finance options, enabling you to unlock capital in your unpaid invoices.
If you are a small business with low annual turnover, you might find it is your best option on the market, allowing you to receive funding while reducing risk to the lender. It is also a valuable tool for boosting cash flow, provided you are willing to make it public that you are working with a third party.
If you are considering invoice finance for your business, Pegasus will pinpoint the perfect solution for your needs. We have over 60 different invoice finance lenders in our network, enabling us to connect you with the right people and negotiate competitive terms.