Invoice discounting: defined
Invoice discounting is similar to factoring in that the invoice discounting company provides finance to your business against the security of invoices and receivables.
However with invoice discounting, unlike most instances of invoice factoring, the arrangement between your business and the invoice discounting company remains confidential and you maintain control over your business’s sales ledger. Invoice discounting is only available to businesses that sell goods or services on credit to other businesses. The costs of factoring and invoice discounting will differ because the invoice discounting company will not provide the administration services that a factoring company will. Factoring and invoice discounting also differ in the sense that the criteria is higher in order to be able to enter into an invoice discounting agreement. In order to be accepted your business should have good credit control procedures and a proven track record.
Invoice discounting services: What to think about
There are few invoice discounting services provided beyond the provision of finance. Your business will retain control of its sales ledger and chasing unpaid invoices. In fact you will be required to provide reports to the invoice discounting company. Once an invoice has been rendered, a copy will be sent to the invoice discounting company and a percentage of the value of the invoice, say 80%, will be paid to your business by the invoice discounting company.
The rest, less the invoice discounting fees, will be paid once the invoice is paid by the customer. Usually the invoice discounting company will open a trust account in a financial institution of your choice under the name of your business and your business must pay all remittances into this trust account. If you are considering entering into an agreement with an invoice discounting company, you should think about the best way to organise the administration of the sales ledger and the provision of regular reports to the invoice discounting company.
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