Invoice Discounting gives you reliable access to the money in your accounts receivable ledger i.e. unpaid customer invoices – much faster. Instead of waiting for your customers to pay your invoices, you take out a short-term loan from an invoice discounting or invoice financing company such as CredAble. In this service, providers similar to us will lend you up to 95% of the value of the invoices, paying you the money in a matter of days rather than weeks. Once you receive payments from your customers, you pay back the loan to the invoice discount providers.
Invoice discounting, also called Invoice Financing by many, is different to invoice factoring in several ways; one of the main differences being confidentiality. Your customers never need to know whether your business is using invoice discounting providers, whereas invoice factoring is usually harder to hide.
How Does It Work?
Invoice Discounting is very similar to having an overdraft facility or a series of short-term loans secured on your accounts receivable ledger to make up for unpaid invoices and keep the cash flow steady. This is how it works:
- You sell your goods or services to your customers as usual.
- You raise invoices for those goods or services and send them to your customers to get paid.
- For aby reason, if the payments are being delayed, an invoice discounting company such as CredAble lends you the value of the raised invoices, after verifying that the invoices are valid.
- Your customers pay you according to your normal payment terms as you are still the credit controller.
- Once you have received payment from your customers, you repay the loan to the invoice discounting company, with the addition of the agreed fee to cover costs, risk, and interest. The fee is usually very low and lies between 1% and 3% of the invoice total.
- In some cases, your customers might need to pay into a trust account in your business name that is controlled by the invoice discounting company. This eliminates the risk of non-payment by you to the lender yet maintains confidentiality.
The Advantages of Bill Discounting
The biggest advantage that Bill Discounting, another name for Invoice Discounting, offers is that you know you are going to get paid quickly. This makes a significant impact on your cash flow, especially if you have clients who normally take a long time to clear their invoices.
Another major advantage of Invoice Discounting finance is that it is usually cheaper and a lot simpler than applying for a bank loan – and you’re more likely to be approved. With an Invoice Discounting service such as the one provided by CredAble, you should also have a more predictable revenue stream. This makes it easier to forecast and plan for your business, which in turn may allow you to take advantage of new investment opportunities.
The money you obtain via Invoice Discounting could be used in various ways: to take on temporary staff as seasonal sales traffic demands; to buy more stock or raw materials; to carry you through a tough trading period, or to invest in expansion and up scaling.
Invoice Discounting is Confidential
Many companies prefer Invoice Discounting to invoice factoring because it offers confidentiality. None of your customers needs to know that you are using an invoice discounting service. This is why invoice discounting is sometimes called confidential invoice discounting as well. It is possible to have confidential invoice factoring as well, but this is generally less popular as it generally gets very complex.
Therefore, if you want to be paid quickly for your accounts receivable ledger but at the same time, you don’t want your customers to know that you’re using invoice finance products and services, invoice discounting is probably your best bet. This also leaves you in control of chasing invoices depending on the creditworthiness of your customers.
How to Implement Invoice Financing
First, you need to decide whether you want to discount your entire accounts receivable ledger, called whole turnover invoice discounting, or to discount only a few specific invoices, which is called selective invoice discounting. Also, consider the fact that for smaller businesses it is not always possible to do selective invoice discounting. That is because invoice discounting companies prefer to minimize their risk by spreading it as widely as possible.
Next, contact several financial services providers such as CredAble and compare their services and fees. Try and ask for references from their customers. These will be anonymous in most cases but may still be incredibly useful in helping you decide which company to choose. Don’t forget to talk to your accountant before making your final decision – they may have useful advice.
Once you have signed up with your chosen financial services company, they will guide you through the process. At CredAble, we help you by setting up payments to you, arranging a trust account for customer payments (if required), and linking into your invoicing process so that you are paid as quickly as possible. Usually, most or all of this can be set up online if you are using cloud-based invoicing software.