Invoice discounting the basics

Invoice discounting is an alternative way of drawing money against your invoices. However, your business retains control over the administration of your sales ledger. It also provides a cost-effective way for profitable businesses to improve their cashflow.

Invoice discounting is only available to businesses that sell products or services on credit to other businesses. A proven track record and a business annual turnover of at least £500,000 are usually required. Unfortunately, this option can also be expensive, and could tie you in to a long contract.

How invoice discounting works

After the invoice discounter has checked your business systems, and customers, it may agree to advance you a certain percentage of the total outstanding sales ledger.

A monthly fee will be payable to the invoice discounter, and you will also have to pay interest on the net amount advanced. This is in addition to advances received or money repaid. The money will fluctuate monthly depending on whether you have repaid monies, or have been given a further advance by the discounter.

For example, if the invoice discounter agrees to advance 80 per cent of the total owing and the total of outstanding invoices are steadily changing, then so will the amount you receive. If the outstanding debt drops month on month, you must repay 80 per cent of the fall in debt. If the debt rises month on month, you will receive 80 per cent of the increase.

Invoice discounting in a nutshell

• You collect the debts and do the credit control.
• Your customers do not usually know about the invoice discounting, although it is sometimes   disclosed.
• Annual turnover must usually be at least £500,000, although increasingly smaller businesses will be accepted. Generally, discounters will review the credit history and profit track record of your business. They will have stringent requirements regarding the quality of sales ledger systems and procedures.
• The invoice discounter will check regularly to see that your procedures are effective.
• You can choose between recourse and non-recourse facilities, determining who is responsible for recouping unpaid invoices.

By Martin Huckle