Learning Centre

Invoice Discounting

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What is invoice finance/factoring/discounting?

Invoice factoring and invoice discounting both help ambitious companies expand and grow. They refer to the same essential process: an asset-based working capital solution that allows businesses to get advances on cash they are due from customers, rather than waiting for those customers to pay. For many businesses, waiting for payment can cause real problems, and prevent them from investing in growth. The various forms of invoice finance allow businesses to free up capital to free up capital tied up in invoices with long remittance terms.

Factoring and invoice discounting, have become a major source of working capital finance since the restriction of bank financing, as a result of the credit crunch. Invoice finance is more attractive to a bank because it depends on the collateral of the invoice due from the debtor. New, post-credit crunch bank capital regulations have resulted in banks transitioning companies away from unsecured loans and overdrafts and on to this mode of lending.

How traditional invoice finance and factoring works

  • You provide the goods/services to your customer and invoice them
  • You send the invoice details to the invoice finance provider
  • Funds are made available of a certain percentage of the face value of the invoice. Usually within 48 hours (see different factoring companies for invoice advance % details)
  • Either your own credit controller or the invoice finance provider’s sales ledger service carries out the invoice collection procedure
  • When your debtor pays, the balance of the invoice is made available to you – less a service fee

Invoice Financing in the UK

The UK has the highest penetration of factoring or invoice discounting in the world at c.12% of GDP. Despite invoice discounting now being a major source of working capital financing, MarketInvoice offers a number of advantages over traditional invoice finance.

Advantages over traditional invoice finance

The following points highlight some of the advantages over traditional invoice finance and invoice discounting:

  • No contractual locks-in: small companies do not have to sell all invoices
  • No expensive ongoing service fees
  • No requirement for high initial arrangement and take-on fees
  • No need to switch off the facility with little or no warning
  • Factoring providers aim to minimise their own risk and factoring can therefore be onerous on the recipient of funds
  • More favourable terms and conditions
  • Finance over single invoices rather than excluding certain debtors
  • No strict, arbitrary funding limits
  • Traditional financing and arrangements such as factoring are no longer the best options the market has to offer to raise working capital as the terms are rigid and costly.

MarketInvoice: An online invoice finance solution

Innovative, online financial alternatives have entered the market in recent years using cloud-based technology to increase efficiency and speed. Recently they have become a more mainstream way of financing your business particularly as the industry was mentioned in the Breedon Report on alternative forms of funding and the 2012 Budget.MarketInvoice offers an alternative online invoice discounting solution that is better than traditional invoice discounting, it is a form of selective invoice finance. It offers a service that is flexible, cheaper and less risky than its competitors.

Factoring of receivables is a means of freeing up capital tied up in invoices with long remittance terms.

  • Factoring facilities are traditionally whole-turnover
  • The entire sales ledger of a company must flow through the factor
  • This can become expensive and not reflect the most cost effective solution for companies to raise their working capital

Many small businesses witness seasonal fluctuations in cash flow and so selective invoice finance would be a much cheaper solution

Different types of invoice financing

There are many different types of invoice financing that can affect how efficiently businesses can obtain working capital. Below are a number of examples:

Confidential invoice discounting

Confidential invoice discounting is an area of invoice financing that can be arranged confidentially, so that customers and suppliers are unaware that the business is being advanced capital against sales invoices before payment is received.

Invoice discounting funding limits

In the case of invoice discounting many companies do not assess individual debtor accounts, but protect themselves against the insolvency of debtors by relying on a good spread of the business and a provision to protect themselves against undue concentration of a large proportion of sales on individual debtors.

Selective invoice discounting

Selective invoice discounting, like spot factoring, is where single receivables are sold to a third party. Factoring facilities are traditionally whole-turnover, whereby, the entire sales ledger of a company must flow through the factor.

Whole turnover invoice discounting

Whole turnover invoice discounting is different to selective invoice discounting or spot factoring in that every invoice must be sold in a whole turnover facility, irrespective of need.

MarketInvoice offers Invoice Discounting on a flexible and cost-effective basis, allowing businesses to unlock the cash in their invoices within 1 to 2 days.

MarketInvoice offers a new, innovative take on invoice discounting, whereby businesses can sell individual invoices in a flexible process puts them in control as never before.

Find out how your business could benefit by checking out how MarketInvoice works.