Invoice discounting is a popular form of asset-based finance businesses use to manage their cash flow. It is similar to factoring in that it involves selling accounts receivable to a third-party provider. Still,a few key differences make it more appealing to larger businesses.
One of the main advantages of invoice discounting is that the business retains control over the administration of its sales ledger. This means that the invoice discounting provider remains a “hidden partner”, and customers of the business will continue to be invoiced as usual. This can be particularly valuable for larger businesses that may want to maintain their relationships with customers and suppliers and maintain their reputation and brand image.
Another benefit of invoice discounting is that the funding provided tracks the growth of the business. As the business grows and its turnover increases, more funding becomes available. This can be a major advantage for larger businesses with significant growth potential and needing access to more considerable working capital.
The process of invoice discounting typically involves a business selling its unpaid invoices to an invoice discounting provider for a percentage of its value. The provider will then advance a certain percentage of the value of the invoices to the business, typically up to 90%, with the remainder held back as a reserve. Once the customers have paid the invoices, the reserve is released to the business, less any charges or fees.
Invoice discounting fees are typically lower than those associated with factoring and are typically based on the volume of invoices being discounted. These fees are usually charged monthly and are calculated as a percentage of the total value of the discounted invoices.
In summary, invoice discounting is a valuable form of asset-based finance that can help larger businesses manage their cash flow and unlock funding based on their growth potential. The ability to retain control over the administration of the sales ledger and access funding that tracks business growth are two key advantages that make it an appealing option for businesses.