Is invoice discounting right for my business?
As we have discussed in previous blogs, invoice discounting is the name given to an invoice finance facility which gives business owners the opportunity to leverage the value of their sales ledger in order to grow their business. When you go down the route of invoice discounting and you raise an invoice for a client, you can then claim a proportion of the amount owed from your invoice discounting provider, which gives you access to a good amount of working capital to help you to get through the month.
This type of invoice finance is very similar to invoice factoring, with the main difference being that your customer is not made aware of the fact that you are using their invoice as a finance option. You still remain in control of your whole sales ledge, and so you are the one who has to send out payment reminders and collect the payment as usual. Many people prefer this type of finance as it means that they maintain the relationship with the customer, and therefore maintain the level of communication and customer service that your customer is used to.
How does invoice discounting work?
When you use invoice discounting as a way to finance recruitment agencies, for example, the day to day running of the sales ledger pretty much remains as normal. You will send out invoices as normal when orders have been fulfilled or work completed. What happens then though is different from normal as you will need to send your finance provider a copy of the invoice (or invoices) and they will then deposit the pre-agreed portion of each invoice into your bank account. You are then free to use the money straightaway to pay outstanding bills, pay off loans or invest in your businesses future in whichever way you would like to.
The key to success with invoice discounting is to send out your invoices as soon as work is completed, as this will mean you should achieve a regular flow of cash throughout each month. Once the agreed portion of the invoice (usually 80 or 90%) has been paid into your account by your finance provider, then you collect the invoice payment from your customer as usual. Any fees or charges will then be collected from this payment by your provider. You need to make sure you fully understand all fees and/or charges up front, therefore, so that you can budget accordingly and really make the best of the cash you will receive.
Should my business use invoice discounting?
This is a hard question to answer, as all businesses are different, and there are a lot of different finance options available out there. However, invoice discounting might be a good option for you if:
- Your business turnover meets the minimum level as set by your chosen provider
- Your customers usually pay your invoices on time
- Your payment terms ask for payment within 30 days
- You have effective and robust credit control procedures in place already
- You have a minimal amount of bad debt (if any)
One of the main considerations to take into account when considering invoice discounting for your business is whether you normally carry out credit management processes in house or not. If you don’t then invoice factoring may be a better route for you to gain finance from, than invoice discounting. The other thing to consider is how old your business is. Invoice finance is generally not offered to start-up businesses as they don’t usually have reliable turnovers or credit management processes in place.
Terms you should be aware of
In most cases invoice discounting is confidential and so your customers will not know that you are using it as a way of financing your business. However, sometimes providers may ask that it is disclosed to your customers, which would mean placing a short statement on each invoice you send out to let your customers know that their invoice has been assigned to a third party, although you will still be the one who is collecting payment.
Other times the finance provider may point out that their terms and conditions include the words ‘with recourse.’ What this means is that the provider has the right to claim back money from you if your customer does not pay the money they owe. The other option to this is ‘without recourse’ which means that you will pay a little more to the finance provider as payment for a credit insurance policy. This is the best thing to do if you have any doubts on your customers ability to pay!
As you can see, the invoice discounting process offers businesses a wide range of potential benefits and it is no surprise that it is often used as a way to finance for recruitment companies. At Finance4Recruitment we can offer you.