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What is Invoice Discounting?
Invoice Discounting is a quick method of accessing funds from your sales ledger and is generally offered by most financiers on a confidential basis ensuring your customer base is unaware of the financier’s involvement. The facility allows you to remain in control of your full credit management leaving very little difference in how you currently operate your business.
The financier will simply ask you to upload your sales ledger, either by a CSV file directly from your accounts package or some financiers will even offer software that will automatically extract the information to their systems as and when you update your sales ledger.
Why use invoice discounting?
- Confidential method of funding the business using the debtor book as the primary security
- Remain in control of your sales ledger, collections and management
- More often than not cheaper to run than an Invoice Factoring facility
- Flexibility over both overdraft and loan as the Invoice Discounting line grows with sales
- Access to funds usually within 24 hours
- Up to 90% of the approved invoice values made available within 24 hours
- Fast reinvestment of funds, turning the cash cycle of the business more quickly relieving the pressure from having to wait for customer payment terms to be met
- An excellent way to support growth, using the debtor book and minimising the requirement for further capital investment
- Increased cash flow can assist bulk purchasing generating possible higher discounts
Does my business meet the criteria for Invoice Discounting?
- Must be business to business trading only - any general public sales will be excluded
- Business turnover should be a minimum of £50,000 (exc vat) per annum, no maximum turnover
- The business should have the in house ability to manage the credit control and have robust financial systems in place that meet an acceptable standard of the financier. (Lenders will accept the use of an outsourced credit control function)
- Most financiers would insist that both the VAT & PAYE were up to date with no arrears. In some cases arrears will be considered if there is a payment plan in place with a means to repay)
How does Invoice Discounting work?
The Invoice Discounting provider will agree to purchase all business to business invoices and to release an agreed value, generally up to 90% of the approved invoice value to you usually within a 24 hour period.
The on-going process:
- Complete the works or services as per the customer's purchase order
- Gain some form of evidence that the works have been complete in accordance of the purchase order. This can be either via email or a signed collection/delivery note etc.
- Raise the invoice for payment, ensuring the payment terms and payment account details are clearly visible
- Upload a copy of your sales ledger to the Invoice Discounter
- The invoices will then be assessed with regards to the credibility of the customer ensuring that they have the appropriate funding limit
- Once the assessment has been complete the agreed percentage of funds will be released to an account known as a trust account, this will be accessible online allowing you to draw down funds as required by your business at that time
- As a general rule you would be expected to have the ability to raise statements on a monthly basis and send them directly to the customers reminding them of their payment obligations
- You should have a robust collection procedure in place ensuring that your ledger is maintained and paid within acceptable time scales and any queries or disputes are quickly resolved
- The customer payments will be credited into the Trust Account less the Invoice Discounter's charges
- Once the payment is received from your customer you will have the ability to use the trust account to reconcile your ledger marking the invoices as paid
What security would be required?
As a general rule the following would be required:
As a general rule the following would not be required:
- An all asset debenture to be registered at companies house (some funders may only take a specific charge over the debtor book, although this is unusual)
- A personal guarantee (generally capped at a percentage of the funding limit)
- Fraud only warranties maybe considered by the financier in place of a personal guarantee but this is usually only offered to a company that has high retained profits in the background to support any risk
- A charge over a tangible asset (such as a director's home or business premises)
It’s important to understand that the debtor book is the primary security hence the importance held behind ensuring the debt is collectable through a solid audit trail evidencing strong sign off / acceptance that the work has been complete. It may be seen as a hindrance to get someone to sign off a job sheet on a construction site on a Friday but you must remember memories soon fade and it’s sometimes very difficult to prove later on down the line that you had completed the works to the customer’s acceptable standard.
It’s in this situation that the debt can become uncollectable and then lays question to should the financer risk funding you any further. The financier would prefer to have a successful business where the relationship is mutually profitable rather than be placed into a position where it had to call upon a guarantee as it was unable to collect the debt from the customer base due to a lack of provability.