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Invoice discounting – a small business guide

October 8, 2011

Unless you’ve got mortgage-free commercial premises or machinery, the biggest asset in your business is probably its sales ledger.

Its value shouldn’t be under-estimated. The money your business will bring in each month is a valuable tool that can be used to make business life easier.

For example, you can borrow against that sales ledger to improve your cash flow, with something called invoice discounting. This is offered by factoring companies, who help cash flow by lending businesses money while they wait for invoices to be paid.

Invoice Discounting – What is it?

With invoice discounting, a factoring company will lend you an amount of money each month, as a kind of advance against the money you expect to be receiving. The advantage of this for you is that you see the money shortly after issuing the invoice, rather than 30 or 60 days later.

For a growing business this can be essential, as it means there is less working capital tied up in unpaid invoices.

Typically your business needs to be of a certain type and size to be accepted for invoice discounting. It needs to sell products or services to other businesses and offer credit, such as 30 days to pay an invoice.

Some factors won’t offer invoice discounting to businesses turning over less than £500,000, or without a good track record.

Either way, the factor will want to know a lot about your business before it takes you on as a client. The factor has to satisfy itself that you have a good credit history, a record of profit, a solid sales ledger with proper procedures in place, and a good client base.

Once you have been accepted, your factor will agree to advance a certain percentage of each month’s sales ledger. Every month it gives you more money or you must repay some, depending on whether the total amount of money owed to you by your clients has risen or fallen.

In return for this you will pay a monthly fee, plus interest on the money borrowed.

Invoice Discounting – Is it for you?

Compared to full factoring where you pass your entire invoice to the factor, you have the advantage of staying in charge of all credit control and client contact. Your clients need not know you are using invoice discounting.

But because of the type of lending, your factor may demand to see proof that you are adhering to agreements and that your business continues to have adequate systems in place.

Invoice discounting is not the cheapest way to finance your business, but it is one of the more flexible. Your arrangement should grow with you, allowing you to borrow more as you sell more, and without having to constantly re-arrange terms.

Invoice Discounting Resources

  • It’s a competitive marketplace with many factoring companies fighting over business. So shop around and ensure your choice is a member of ABFA, the Asset Based Finance Association.

More cash flow and financing help

You can find help and tips on all aspects of business funding on ByteStart. Here are a few of our popular guides to help your cash flow;

And these will help you with other business funding options;