The age-old saying ‘cash is king’ has never been more relevant. Cash flow is the most powerful tool for making, breaking or excelling your business. It puts you in a better position to negotiate with suppliers, take advantage of opportunities and weather financial storms. That’s exactly why you might consider invoice discounting – it’s an excellent option for businesses looking to improve their cash flow.
What is invoice discounting?
Invoice discounting is a type of business financing. It’s also known as invoice finance or debtor finance.
It’s a funding solution facilitated through a financier that allows businesses to get up to 85 per cent of invoices paid within 24 hours. The balance is then transferred, minus fees, once the debtor pays.
It may sound complicated, but as soon as you’re set up and approved within your invoice finance facility’s platform, the process is relatively simple.
How invoice discounting works
- Your business secures a sale and then invoices your customer.
- Next, you send the invoice details to the invoice finance provider, or upload it into their system.
- An agreed percentage of the invoice funds are then transferred to you from your finance provider within a short timeframe.
- Either your business, or the invoice finance provider’s service, carries out the invoice collection procedure.
- The invoice is paid into the finance provider’s bank account.
- The balance is transferred to you – less any fees.
There are two ways invoice finance can be set up – confidential or disclosed.
What is confidential invoice discounting?
Confidential invoice discounting is a type of debtor finance where your customers don’t know there is a third party financier involved. You’re under no obligation to tell your debtors that you’re using invoice discounting, and the financier has no right to contact your debtors on your behalf.
It generally attracts higher fees as the risk to the financier is greater. This is basically because the financier can’t put their own debtor management strategies in place as your clients don’t know they’re involved.
How is the payment process different?
Once your facility has been approved and it’s all set up, you simply communicate a change in bank details to your debtors (without telling them the reason for the change). The new bank details are for a bank account held in trust by the financier.
You then upload the invoice into the financier’s system at the same time you send them to your debtors. Within 24 hours up to 85% of the invoice value will be directly transferred to your bank account by the financier. Then, once your debtors pay the invoice into the trust bank account, the financier transfers the balance to you, minus their agreed fees.
This process means you can keep your existing accounts payable procedures in place while accelerating your cash flow. Chasing up late payers remains your responsibility, but that also means you get to maintain control of that vital relationship.
What is disclosed invoice discounting?
With disclosed invoicing, all parties are aware of, and agree to, the financing facility. Your invoices will need to include a communication regarding the third party financier and the financier has the right to contact your debtors to chase payments.
It also allows you to hand off debtor collection procedures to the financier and provides full visibility for all parties involved. Disclosed invoice discounting usually attracts lower fees than its confidential counterpart, as the financier has more control over the debtor management process. However, your business needs to have a strong credit rating in place to be eligible and your customers may prefer not to have a third party involved.
How is the payment process different?
Once you’ve been approved for disclosed invoice discounting, the financier will get in touch with each of your debtors as you upload their invoices into the system. They’ll need to pay the invoices into a bank account held in trust by the financier, as per confidential invoice discounting. However, the debtors will also be aware that it isn’t your business’s bank account.
Just as with confidential invoice discounting, you’ll receive up to 85% of the invoice value within 24 hours of uploading the invoice into the system. Then the financier will liaise with your debtors to collect payment. Once the debtor has paid, the balance of the invoice value will be transferred to your bank account, minus fees.
Which is right for your business?
The best choice for your business will generally depend on two factors:
- What’s the business’s current credit rating? If your business has a strong credit rating, you may be eligible for disclosed invoice discounting and the lower fees that come along with it.
- Do you want to remain in control of your debtor management? Some businesses prefer to keep debtor management as part of their client relationship, while others are happy to hand it off to a qualified third party.
Regardless of which option you choose, invoice discounting certainly isn’t something to be ashamed of. Some businesses may feel it’s a bit taboo, but that couldn’t be further from the truth. Far from signalling that your business is in financial strife, engaging a financier to access your receivables means you’re being smart about your cash flow. Accessing one of your biggest business assets, faster, simply means you’re more likely to be able to grow – which is better for you, your suppliers and your debtors.
Want to know more?
Here at Octet, we offer flexible invoice discounting. If you’re considering it as a funding option, simply get in touch with us. We’re happy to discuss the process and help you determine which type of invoice discounting solution might best suit your business’ unique requirements.
Disclaimer: The following comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as at the date of publication and are subject to change without notice.