What is Invoice Discounting

Invoice discounting is one of the two aspects of invoice financing. Unlike the other aspect, invoice factoring, discounting enables you to remain in control of invoice collection. This is usually the form of invoice financing chosen by companies who don’t want their customers to know that the company is using the services of another organization to collect outstanding debts for products and services. These businesses fear that such knowledge will potentially alienate clients. Invoice discounting is also preferred by medium and larger sized businesses who would like to maintain some form of autonomy.

Aggression?

However, smaller businesses usually opt for invoice factoring, especially if they lack their own credit control staff. This is because the invoice financing provider takes care of the invoices as well as providing the business with instant cash. Nonetheless, it should be noted that providers tend to be aggressive when it comes to extracting payments from tardy clients. This can drive a wedge between client and company. Smaller companies may have slow-paying clients who are still important to the company and this could be jeopardised by a provider who constantly contacts clients seeking overdue funds.

Benefits

The practice of invoice discounting is gaining a substantial following amongst businesses of all sizes that are keen to benefit from having 80-90% of their invoices paid immediately with the rest paid when the client pays what is owed to the provider. Although there are fees and a rate of interest attached to what is essentially a loan, the prospect of having readily available cash to pay for new stock, deal with staff wages and plan for the future is an alluring one for companies of all sizes. The main reason why invoice discounting is chosen is because it enables companies to stay in control of their debt management system. This is important because companies that use providers for invoice factoring find that clients who are assessed as a credit risk are no long allowed to do business with the company. This can leave a severe hole in an organisation’s client list.

Security

Invoice discounting allows you to have the security of invoice payment while still giving old and important customers some leeway. This allows you to continue a positive working relationship while hiding the fact that you have an invoice financing provider on your books. You get to choose credit control methods without input from the provider.

Although recourse finance is the cheapest option in invoice financing, it is not always the best. This is because you remain responsible for the invoices being paid. If a client defaults on what is due, you will owe whatever money a provider has paid you. Non-recourse finance is more expensive but you have the security of knowing that the provider is responsible for the invoices being paid. If a client fails to pay up, it is the provider who loses out.

Each invoice discounting provider has their own individual set of terms and conditions so it is important for a company to analyze each provider and decide which one is most suited for the company’s specific needs. Small businesses tend to lack a credit department so non-recourse invoice factoring is their choice because all their invoice needs are taken care of.

We can offer you financial solutions to help keep your cashflow healthy. Request a quote now to find out how much invoice finance can save you.


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