The elastic finance of invoice discounting

The phone rang.

Dave picked it up.

It was a customer ordering saw blades.

Dave wrote down the details on a pad.
To my horror Dave had used the sales invoice pad and he proposed to send the invoice to the factoring company that very day so he would be paid before he even purchased the saw blades.

But factoring carries the stigma of financial difficulty. This lead to the growth of confidential invoice discounting where there is no disclosure to the customer.

Also, prior to 2001 banks happily lent on overdraft, safe in the knowledge that their fixed and floating charge placed them near the top of the pile in the event of a client’s failure.

But a Privy Council ruling in 2001 changed all that by pushing the banks too far down the security pecking order for their liking.

The banks responded by transferring their banking clients over to their invoice discounting subsidiaries where not only was the security better but the rewards were also higher too. This is the biggest growth area in the financing of SMEs.

The 48,000 plus companies using these facilities are, generating a combined turnover of £200 billion.

So, what exactly is invoice discounting?
It’s a quick way to free up money without changing your credit control procedures. Unlike bank overdrafts, it¹s a flexible facility that grows with your business.

This is the elastic finance.

What are the benefits of invoice discounting?
• Immediate working capital ¬ the more you invoice, the more cash you get. Up to 90% of sales invoice value available when you bill your customers.
• It’s confidential – your customers will never know.
• Cleared funds can be in your account the day after you raise the invoice.
• You retain control over your credit control function.

What are the disadvantages of invoice discounting?
• The cost of an invoice discounting facility will reduce the profit margin on each order your business transacts.
• It reduces further borrowing.
• An invoice discounter will almost always want to run a credit check on your customers and as such may influence who you do business with.
• It may be difficult to end the arrangement as you will have to raise alternative finance.

Norman Snodgrass
Mayes Accountants