Traditionally a business would raise an invoice and wait the 30, 60 or 90 days to receive the customer’s payment. By using invoice discounting you receive up to 95% of the invoice amount within 24-48 hours of raising the invoice. You continue to chase payments and maintain customer relationships but the funds are ready to use almost straight away.
- Once you have found the finance provider you wish to deal with you will usually enter into a contract. When you send an invoice to a customer you will also send a copy to the finance provider.
- The finance provider will advance up to 95% of the total invoice amount
- You collect the payment and liaise with your customers as usual. There is no need for your customer to know any third party is involved.
- You receive payment from the customer and send this to a dedicated bank account managed by the finance provider.
- On receipt of the full payment the finance provider will pay you the remaining balance minus the agreed fee for their service.
A customer owes you £20,000. You send the invoice to both the customer and to the finance provider. The finance provider pay you £18,000 (90% of the debt). You collect the total £20,000 from your customer and, on receipt, pay it to the finance provider. Once they have the full amount they will pay you the remaining £2,000, minus any fees you owe them.
Easy, right? WhatCost can make it even easier
While the concept is pretty universal the contract terms, fees and service quality you get will vary depending on the provider.
The finance provider will earn money both from the interest rate it charges on the loan and from a monthly fee to maintain the arrangement. Every company will be queueing up to tell you they’re the best in the business, but there are several factors to consider when making your choice.
In addition contracts tend to be on a longer term basis so now is the time to do your homework. This is where we can help; send us an enquiry and we’ll recommend up to three different providers that are best suited to your business. Once you have your quotes the choice is up to you.
Each provider will offer a different level of advance. Generally this is between 70-95% of the total invoice amount.
Each provider will charge you differently. While some will specify an ‘all in’ amount, some may add extra charges for additional services. For example, sending letters, performing credit checks, same day bank transfer could all incur additional charges or ‘disbursements’.
There may also be interest charges if a customer is late in paying their invoice. What happens if the customer doesn’t pay at all? It’s best to get it all out in the open so ask all your questions at the outset.
The invoice discounter is relying on your competency to collect the payments, i.e. that your credit control procedures are up to scratch and your customers are generally reliable. They may want to regularly audit your books so it is important you can demonstrate success in this area.
What happens if one of your customers cannot pay their invoice? Customer insolvency is a risk that needs to be considered by both parties and some finance providers include ‘bad debt protection’ or ‘recourse facilities’. This insurance means in the event that a customer does not pay, the funds can be recovered. If this is not included in your contract in the event that a customer does not pay you will have to pay back any funds advanced by the provider.
Debt Exposure Limit
Sometimes called a ‘high involvement’ or ‘concentration’ limit, this may come up with some providers who demand that only a certain percentage of a business’ sales ledger can be from a single customer. For smaller businesses who work primarily with a few key clients this can be a stumbling block.
You’ve decided that invoice discounting is the boost your business has been looking for, but what to do now? WhatCost can help you make the right choice for your business. Complete the form below to get the best deals on invoice discounting.