Invoice Discounting

Name: Invoice Discounting
Creator: Savvy
Published: 2022-01-07T11:02:30+10:30

Home > Business Loans > Invoice Discounting

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Written by , updated on July 26th, 2023

Is invoice discounting different to invoice factoring?

Yes – while both invoice bill discounting and factoring fall under the umbrella of invoice finance, there are several key differences between the two of them which are important to consider.

Nature of finance

While discounting uses invoices as collateral for a line of credit, factoring involves you selling them to your financier, after which they pay you a portion of the owed amount and the rest upon client payment (minus fees). In this way, invoice factoring isn’t really a loan, as you’re simply receiving the money owed to you early and paying a premium for a third party to help you collect it.

Upfront payment

Invoice factoring will usually provide a larger upfront payment to the business of up to 95%, giving you more money to work with from the outset. While you’ll receive the full amount minus fees in either type of finance, this may be a more relevant consideration for you and your business if you desperately need the funds owed to you.

Level of involvement

Invoice discounting leaves the ball in your court when it comes to seeking out payment from clients, after which you submit your invoices for approval directly to your financier. However, with invoice factoring, your financier handles this process, saving you on time and stress but taking the control of debt collections out of your hands.

Cost

Because it’s a more hands-on process from start to finish, you could be charged more in fees for invoice factoring than discounting. Outsourcing the job of seeking out payment from owing customers will result in the cost of factoring increasing, with service fees (charged on each invoice), due diligence fees (covering administrative costs) and discount rate (percentage rate paid to financier) all applying. However, interest is a relevant concern for discounting, which isn’t really the case for factoring.

Confidentiality

Invoice discounting is fully confidential, meaning your debtors won’t find out that you’re using it to boost your business’ cashflow. However, because factoring requires you to sell your invoices off to your financier and have them pursue payment with debtors directly, this type of finance isn’t confidential. This may affect existing relationships with clients, so you should be careful.

Types of business loan

Unsecured business loans

The most common type of business finance, unsecured loans enable businesses to access the funds they need without attaching an asset to the loan as security. Some lenders may allow you to borrow up to $500,000 and, because there's no collateral, offer same-day approval.

Secured business loans

If your business already owns valuable assets, such as property or expensive equipment, you may choose a secured business loan instead. These loans may increase your borrowing power beyond what an unsecured loan can offer and, crucially, typically come with lower interest rates.

Small business loans

Business loans don't always have to be worth hundreds of thousands. If you're operating a small business and need a boost to help you keep on top of your expenses or expand your company, you may be able to take out a loan starting from as little as $5,000 and unlock further capital.

Low doc business loans

Just because you don't have all the required documents for a standard business loan doesn't mean you're out of options. Low doc finance enables you to use alternative documentation, such as other business financials, in the application process to access the funds you need.

Lines of credit

A commercial line of credit allows you to draw from your loan account whenever your business needs access to their funds, instead of managing a lump sum and repaying it like a regular loan. This can add flexibility to your finance arrangement, providing money when you need it.

Invoice finance

Invoice finance presents another option to business operators looking to free up cash through outstanding invoices yet to be paid by their customers. Your invoice finance can either be invoice discounting or factoring, which present different options when it comes to your invoices.

Equipment loans

A common reason for seeking out a loan is to purchase commercial equipment. You can do this either with an unsecured arrangement or one with the equipment itself as collateral, with the latter potentially increasing your borrowing power and lowering your interest rate.

Supply chain finance

With this finance, when your business purchases product, your supplier provides an invoice which you send to your financier and pledge to repay by a set date. From there, your supplier sells the invoice to your financier at a discounted rate, while you repay the full amount to your financier.

Inventory finance

Under an inventory finance agreement, your lender pays your supplier directly for inventory, which allows it to be signed off and sent to you. From there, you can pay off your debt within a pre-determined period to your lender, which may be longer than the regular debtor period.

Overdraft facility

An overdraft facility is attached to an existing financial account belonging to your business, such as a transaction or savings account, and enables you to borrow up to a set limit after the account’s balance reaches zero. These overdrafts are repaid with interest, but only on what you use.

Cash flow loans

You may simply be in a position where your business needs a boost to its cash flow. If this is the case, there’s a range of stop-gap solutions which may be suitable for your situation, from standard unsecured loans to specialist cash flow loans, invoice finance or even an overdraft.

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The pros and cons of invoice discounting

PROS

Boosting business cashflow

Your business can access the funds it’s owed before they’re paid, helping you avoid dips in available revenue due to a plethora of unpaid invoices.

Flexibility to draw at any time

With a line of credit, you can draw and redraw at your leisure, while you’ll only pay interest on the amount outstanding at any one time.

Keeping you in control

Your financier’s only responsibility is approving payment for invoices, leaving the debt collection process in your hands to conduct how you wish.

Cheaper than factoring

Because you’re doing the work yourself, the overall process may cost you less than opting for invoice factoring and outsourcing the debt collection work.

CONS

Less cash upfront

Although not much, invoice discounting gives you access to less money upfront, with a slightly smaller percentage of your invoice to be released from the outset.

Harder to qualify for

In general, because of the requirement for high cash turnover and robust internal accounting frameworks, it’s more difficult to access for small businesses.

More time-consuming

The other side of maintaining control of debt collection is that it places a time requirement on your business dedicated to chasing up customers.

Potentially high interest

If you leave a significant amount withdrawn on your credit line, it’s likely to accrue considerable interest if you can’t repay it quickly.

Common questions about invoice discounting

How long does it take to get approved for invoice discounting?

When setting up your invoice discounting arrangement with your financier, the entire process of submitting your application and proposal to being approved and opening your line of credit can take just 24 hours. This is another factor as to why businesses may seek out discounting, as it’s highly efficient and provides fast financial relief.

What types of businesses should use invoice discounting?

Because financiers will want to see that your business is capable of tracking its own debts and pursuing clients for payment effectively, it’s generally more suited to medium to large businesses. Small businesses often don’t have the structures in place to do this, so invoice factoring is a more common option for them.

Can I use invoice discounting if my clients are individual consumers?

No – invoice discounting is designed to take place for commercial transactions only, rather than businesses who send out invoices to the paying public. Instead, its intended purpose is to be used for business to business (B2B) dealings, such as supplying stock to a retailer.

Do I have to supply my full invoice ledger?

In most cases, yes – you’ll find that with almost all invoice discounting arrangements, you’ll be required to finance your entire invoice ledger. This isn’t the case with invoice factoring, which is able to be done with individual invoices instead. However, this type of factoring will likely cost you more to complete than doing so in bulk with your ledger.

Can I use non-recourse factoring for invoice discounting?

No – non-recourse factoring is a type of invoice factoring whereby the risk lies with your lender to collect the funds from your client. If your customer doesn’t pay, you’re not required to cover the cost or pay more fees. However, there isn’t an equivalent option offered for invoice discounting.

How long will my line of credit last?

Your line of credit is revolving, which means that, in many cases, it can run as long as you want it to and as long as it remains viable. If you’re able to keep it running steadily for ten years or more, your financier will more often than not allow you to do so.

Should I take out a business loan instead?

An unsecured business loan is another viable finance option for businesses, in which they receive a lump sum and repay it with interest over a set period as short as three months up to five years. While these come with lower borrowing ranges (maximum of $500,000), they’re a highly flexible and fast finance option for you. In this way, they're a viable alternative to invoice finance funding. You can compare a range of unsecured small business loans right here with Savvy to help you find the best loan for your business’ needs.