Invoice discounting: a service to get your invoices paid earlier

Invoice discounting: a service to get your invoices paid earlier

invoice discounting


What is invoice discounting?

Invoice discounting is a service used by companies who sell goods or services to their clients and only get paid after delivery. This creates a working capital need, which is solved with invoice discounting. Especially in case of exports, the time between shipment and payment can be long. Companies selling against cash upfront or for cash in advance are not concerned by this kind of service.

Invoice discounting allows suppliers to release funds tied up in their outstanding invoices due at a later date by their debtors. This service involves a third party agreeing to advance cash to the supplier against supplier’s debtor balances due. This third party is referred to as the invoice discounter.

Invoice discounting increases working capital by providing the supplier with quick cash advances (generally around 80-85% of the total invoice face value). As a result, suppliers can keep up with the upcoming production cycle and growth without waiting for the debtor pay-off.

The specificity of Invoice discounting is to allow the supplier to retain control over the sales ledger and debt collection (the Debtor pays invoices due directly to the Supplier).

Invoice discounting step-by-step

  • The invoice discounter performs a business and financial due diligence on the Supplier seeking invoice funding
  • After the supplier passed due diligence and was approved, the Invoice discounter will set up a credit facility from which the supplier can draw down to obtain funds against its invoice sales at a specifically agreed sales percentage and discount rate
  • The invoice discounter is provided with detailed information on the sales and subsequent receivables to be financed in bulk, at a frequency specified by the Invoice discounter (weekly, monthly, other)
  • On receipt of the sales ledger and invoices’ details batches to be financed, the invoice discounter releases funds at the agreed percentage of invoices’ aggregated face value (most usually 80%)
  • The supplier draws down on funds made available
  • At invoices’ maturity dates, debtors pay the receivable directly to the supplier
  • The supplier transfers the cash received from its debtors to the Invoice discounter
  • The funding sequence is performed on a rolling basis, ensuring continuous access to funding for the supplier

Invoice discounting types:

  • Confidential discounting or non-disclosed
  • Disclosed discounting

Confidential invoice discounting

With confidential invoice discounting (CID), the debtor is not aware that the supplier has requested funding from a third party invoice discounter against the Debtor’s receivables.

Disclosed invoice discounting

Disclosed invoice discounting (DID) is similar to CID, except that the procedure is not confidential. In the DID model, invoices are complemented with Assignment Notices, informing debtors that the invoice has been assigned to an invoice finance provider and that the later has authorised that collections are to be carried out by the suppler.

Why choose invoice discounting?

Invoice discounting provides alternative fundraising opportunities that are generally more accessible and faster compared to conventional bank financing (e.g., credit or overdraft facilities).

There are several benefits of invoice discounting:

  • Possibility to optimize business cash flow and working capital by receiving instant funding;
  • Opportunity to provide salaries to employees, pay suppliers and handle other basic expenses (e.g., rents, utilities, etc.);
  • Ability to improve and develop the business by reinvesting the funds into further production cycles;

Incomlend: an alternative to invoice discounting

Incomlend serves as a marketplace, where suppliers can sell their invoices online directly to individuals or companies willing to purchase them. As a result, the supplier obtains cash in exchange for a discount rate paid to the Funders of the invoices. On its platform, Suppliers funding requests can be done on an individual invoice basis and can go up to 90% of the invoice face value.

 

This entry in exports was updated on August 9, 2017 by specialist.