The Benefits of Invoice Discounting

by Simon Carter on 31 Oct, 2012

Ask anybody who works in credit control about their number one headache and the chances are that they will tell you all about chasing invoices. From the initial, polite reminder to the more frantic requests for money, being passed around from person to person in the hope of receiving what is rightfully yours is a bit soul destroying.

Of course, businesses need constant cash flow to function. Without the injection of funds that comes from paid invoices, future planning becomes tougher, financial management becomes close to impossible and a viable existence becomes increasingly shaky.

Though it’s likely that many unpaid invoices come as part of a chain reaction (one person doesn’t pay another, who then can’t afford to pay another, who then can’t afford to pay you), this doesn’t help matters when the next person in the chain – somebody you owe money to – is demanding payment.

And all of this goes to explain the birth of the industry known as invoice discounting.

What is Invoice Discounting?

Invoice discounting is quite an easy process to explain:

• You raise and send your invoice to your client as normal.

• At the same time, send a copy of the invoice to your invoice discounting company.

• The invoice discounting company will pay you a portion of the invoice (typically up to 85%) instantly.

• When your client is ready to pay, they pay the full invoice amount to the invoice discounting provider.

• The invoice discounting provider sends you the remaining amount (so, the extra 15% in our example) minus their fees.

What are the benefits of this procedure?

The situation is a bit of a winner for everyone. Firstly, you get working capital to fund your business. Although the advancement might only be up to 85% of the monies owed, it is preferential to the 0% you receive by waiting around.

From the client’s point of view, there is a little bit more freedom involved in making the payment. Though you would probably still chase an invoice that was outstanding, you are likely to take a more relaxed approach which will please all parties.

Are there any downsides?

If you visit a leading invoice discounting provider you should avoid things like steep fees and slow payments (exactly what you were trying to avoid) and you should find the entire process very smooth.

The only real downside to invoice discounting is the fact that you will not receive 100% of the invoice amount after paying fees (admittedly, the fees are normally quite small so you won’t notice too much difference) but when compared to the cost of borrowing, this is a drop in the ocean.

About the Author

Simon Carter

Simon Carter is a respected finance writer who contributes regularly to sites in the UK and the USA. He is an expert in personal finance, insurance and corporate finance. Outside of the financial world, Simon is an authoritative voice on marketing and retail.