Should I use Disclosed Invoice Discounting?
Invoice discounting is an increasingly popular method businesses are using to raise funds by effectively selling their invoices to a third party finance provider. When invoices are issued to customers, a copy of the invoice is sent to the invoice finance provider, which then releases up to 95 percent of the value of the invoice within 24 hours. This provides an instant boost to cash-flow without the business having to wait weeks or months for the payment to be made.
There are some different types of invoice discounting facilities available, with selective invoice discounting, confidential invoice discounting and disclosed invoice discounting all variations along a similar theme.
What is Disclosed Invoice Discounting?
A disclosed invoice discounting facility is one where the involvement of the finance provider is ‘disclosed’ to the customer. The invoices sent to the customer must be marked ‘assigned to an invoice provider’, and rather than making a payment into the business’s bank account, the customer has to pay the invoice finance provider directly.
The vast majority of invoice discounting agreements in the UK are ‘disclosed’ rather than ‘confidential’. That’s simply because the turnover of the companies using the facility is not high enough, or their net assets sufficient, for the lender to feel comfortable allowing them to have a confidential agreement due to the level of risk.
How will Disclosed Invoice Discounting Affect Your Business?
- You retain control – Unlike an invoice factoring facility, in a disclosed invoice discounting agreement, you retain control of your own sales ledger and credit control functions. That means you are responsible for deciding who to extend credit to and for making sure customers pay on time.
- It costs more – In a disclosed invoice discounting facility, customers pay the invoice finance provider directly, so more administration is involved. That means it can be double the cost of confidential agreements where payments are made directly into your bank.
- Customers will be aware – Customers will know you’re entering a finance arrangement to strengthen your cash-flow. This could damage customer relationships, although the stigma attached to this type of funding facility has largely disappeared over the last few years.
The Benefits of Disclosed Invoice Discounting
The improved cash-flow disclosed invoice discounting can provide a business to take advantage of opportunities to grow, pay the expenses associated with an increase in demand and bridge the cash-flow gaps associated with late customer payments. It also allows businesses to buy more competitively from their suppliers by taking advantage of early payment discounts.
Another benefit is that the amount of finance you can raise increases as your business grows, often giving you access to more funds than a business loan or overdraft. There’s also no debt created, which means no business or personal assets are required as security other than the invoice itself.
Not all invoice finance providers offer a disclosed invoice discounting, so shop around, compare fees and ask for recommendations from personal contacts to find the right deal for your business.