Have you ever thought about using your invoices to secure funding? Invoice discounting is good idea because it provides an invaluable source of working capital for your business based on your sales ledger. It’s a finance facility that enables you to borrow a proportion of your invoice totals from a lender to fulfil short-term funding needs.
The chief advantage of invoice discounting over a similar facility known as invoice factoring is that you remain in control of your sales ledger. You collect payments and send out reminders as normal, if it is a confidential facility, then the fact you are using your invoices to finance your cashflow is not disclosed to your customer.
Invoice discounting is one of many methods of acquiring funding for your business.
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Read on for an overview of invoice discounting and how it might benefit your short-term business funding needs.
- What is invoice discounting?
- Is invoice discounting right for your business?
- Negotiating terms with lenders
- The pros and cons of invoice discounting
What is invoice discounting?
As you send out your regular invoices, a pre-agreed proportion of each invoice is deposited in your bank account once your lender receives a copy of the invoice. You can then use the cash as you see fit to manage cashflow, pay bills, repay debt, or as part of a long-term plan for growth.
The key to success is to send out your invoices immediately your work is completed. This creates a regular inflow of cash. Once you have received the agreed percentage of each invoice from your lender – typically around 75% to 90% of the total – you collect payment from your customer as normal.
There will be fees and charges to pay which are deducted from the remaining balance by the lender.
TIP: Make sure there are no surprises or hidden costs. Charges and fee structures should be made clear by the lender along with all other invoice discount terms up front.
Is invoice discounting right for your business?
Invoice discounting might not be right for everyone. For example, if yours is a start-up business without reliable turnover then many invoice discounting providers are unlikely to lend to you, but there are lenders who will lend against a single invoice.
Invoice discounting is more appropriate for established businesses which have robust in-house credit management processes, or factoring will work where you rely on the funder for credit control. If you can answer yes to the following 4 questions, then invoice discounting could be a good solution for you to fill a short-term funding gap:
- Do you have robust credit control procedures which have been proven to work?
- Does your business have few bad debts?
- Do your customers generally pay their invoices on time?
- Do you give your customers a minimum of 30 days to settle their accounts?
Negotiating terms with lenders
There is a plethora of firms on the market offering invoice discounting and invoice factoring products. At Pegasus Funding Resources we have access to over 600 sources of funding. We are able to give you professional advice on which invoice discounting product might be best for your business’ needs, we put lenders into competition to ensure that you obtain the most favourable terms.
Lenders will often seek to mitigate risk of lending by limiting how much money they advance or charge higher fees. By thoroughly researching the market we can find the providers with the most flexible lending criteria.
Lenders may also reduce their fees after a certain number of invoices have been ‘sold,’ or offer credit insurance to mitigate the risk of non-payment by your customers. However, the financial/accounting side of discounting your invoices is just one of the things that you’ll need to think about, which is why professional advice is so important.
The pros and cons of invoice discounting
Invoice financing is a quick fix for short term cashflow problems. You can normally expect to receive up to 90% of the invoice value within 24 hours of your application being accepted. Funding is secured against your outstanding invoices and no other collateral assets are needed, other than a personal guarantee.
Because invoice finance is ideal for short-term needs you don’t need to tie yourself down to a longer term loan, which represent a financial commitment over a fixed period, you can draw down the funds you need from your ledger as you need it.
By borrowing against outstanding invoices you have faster access to money that you’re owed. And once the customer pays the invoice, the lender gets their money back. There is no lasting impact on the business and invoice finance can be accessed more than once; it’s a great short-term solution.
Just remember, because the fees for invoice finance tend to be calculated as a percentage of your turnover you need to reassure yourself that they are affordable. And beware hidden fees because the practice of invoice discounting is not regulated by the Financial Services Authority (FSA).
For more advice on invoice discounting and other forms of business finance contact one of our expert advisors today.