When to Use Invoice Finance Discounting

invoice financing

The one thing many companies have in short supply, particularly in their early years of operation, is access to reliable and smooth cash flows finance. In the absence of these, short term funding can plug the gaps that arise for a variety of reasons, including late-paying customers, slow business periods or emergencies that arise.

Raising conventional bank finance is an option, but it can often prove to be more of a challenge because of the onerous administrative requirements and need to show the business has an impeccable credit history.

Increasingly, companies are turning to invoice finance as a primary source of ongoing funding because of the convenience, flexibility and cost-effectiveness these alternative financing mechanisms have to offer.

Why Consider Sourcing Invoice Finance in the first Place?

Invoice finance doesn’t require you to prove your creditworthiness. The invoice finance company lends based on the creditworthiness of the customers you have invoiced. As a result, it is usually easier and quicker to raise invoice finance than it is to get approval for a bank loan.

What are the Alternatives?

You can access invoice finance by either opting for invoice discounting or invoice factoring, both of which use invoices as a form of security to fund cash advances to the company. The value of the invoice is discounted, with the company receiving between 75% and 95% of the invoice’s finance until the customer makes the payment. At that point, the invoice finance company pays the outstanding amount, excluding their fee.

Invoice discounting is often referred to as confidential invoice financing because the finance company merely advances funds to the value of the underlying invoices, and the customer has no knowledge of this.

In contrast, an invoice factoring arrangement would see the invoice finance company taking over the entire credit collection process, and the customer is made aware of the fact that a third-party finance company has taken over the management of the company’s accounts receivable book.

Why Opt for Invoice Finance Discounting?

There are many reasons to choose invoice finance discounting over the other conventional bank and invoice finance alternatives. These include:

When you are Looking for Confidential Financing

Companies that don’t want customers or suppliers to know they are making use of invoice financing should choose invoice discounting because it is a confidential service. Nobody outside the company will know about the funding arrangement.

When you Want to Keep your Close Relationship With your Customers

Companies that want to maintain close relationships with their customers are better suited to making use of invoice finance discounting because they will continue to manage the invoice payment process rather than handing it over to the finance company. Invoice factoring gives the finance company the responsibility of managing the debtor’s book for the term of the contract.

When you Want to Access Flexible Funding

Invoice discounting gives the company more flexibility and control than invoice factoring because management can decide when they want to obtain the invoice financing. As the funding needs of a company change, the company can adjust the amount of funding they receive from the invoice finance companies.

When you are Confident that your Customers are Reliable Payers

Invoice discounting provides you with easier access to credit if your customers are reliable payers. You are responsible for securing the payment of invoices. If the customer doesn’t pay the invoice, you will have to spend time and effort on obtaining payment when you could have handed over this function to the invoice company if you had chosen invoice factoring instead.

When you Have a Well-Established and Efficient Credit Collection Process

Invoice discounting makes sense if you have an established credit control system and only need short-term funding of your invoices to cover your cash flow needs. However, if you don’t have the resources and would need to hire and set up an effective credit control process, it may make more sense to rely on invoice factoring.

Invoice financing has given companies a valuable source of funding they can rely on to maintain healthy cash flows. However, it is crucial to choose the type of invoice financing that best suits your company’s particular needs. Invoice discounting and invoice factoring fulfil different funding roles, and it’s essential to determine which of these will support your business growth into the future.

Read More:
Why Are Companies Looking Beyond Banking For Finance?
Avoiding First-time Small Business Owner Mistakes

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