What is Invoice Discounting?
Invoice discounting, sometimes known as spot factoring, is a way for small, under-capitalised businesses to generate a working capital foundation from their accounts receivables. It can also be used to overcome unforseen, short-term cash-flow problems. It is ideal for the business which has a great opportunity and the energy and skills to make it happen, but lacks adequate capital. It is similar in some ways to factoring, but also quite different in others. Much more flexible, you use it only when you need it. It is also ideal for smaller businesses that would not qualify for factoring or bank debtor finance. It can be very cost-effective for businesses in a rapid growth scenario. For example: A small contracting firm gets a big opportuntiy, perhaps a government backed contract, that will greatly increase their turn over. But, they need to take on two or three more workers and purchase various items to make the job happen. If they are not in a position to raise money from the bank they
Invoice discounting is a very effective way of improving a company’s cash flow by converting its invoices into cash. With an initial advance level of 90% it provides an immediate cash injection into the business and an ongoing facility, which grows automatically as sales increase. Invoice discounters will also provide finance against stock, plant and machinery and property – see Asset Based Lending. Unlike factoring you maintain full control of your sales ledger, the issuing of statements and collection of cash. As a result the service charge is much lower.
