Articles

Understanding Invoice Discounting and How It Can Help Your Business

June 14, 2022

What is invoice discounting? 

Invoice discounting is a financial service in which a provider lends cash to a business up to the value of its unpaid invoices (unpaid invoices are also known as ‘accounts receivable’). It’s similar to a short-term bank loan and the intention is to provide help with working capital.

Many businesses work with deferred payment terms – often up to 120 days – on their invoices, which can put a strain on finances. And many businesses struggle to qualify for bank loans that could help their cash flow. However, using accounts receivable as proof of owed money means these businesses can apply for finance from lenders who specialize in invoice discounting.

When the invoices are eventually settled by its customers, the business simply returns the loaned amount to the lender, plus a small, pre-agreed fee for the service.

 

For example:

ABC Supplier Ltd. exports goods worth £10,000 to its overseas buyer, XYZ Buyer Ltd., and raises an invoice with 90-day payment terms. However, ABC Supplier needs immediate working capital to pay its own bills.

So, ABC Supplier submits the unpaid invoice to an invoice discounting provider as proof of its owed income. The discounting provider agrees to provide ABC Supplier with 95% of the invoice value immediately – totalling £9,500 – in exchange for a fee of 2% of the loaned amount when the invoice is paid. This fee will amount to £190.

XYZ Buyer pays the full £10,000 invoice in 90 days and ABC Supplier repays the borrowed sum to the invoice discounting provider, plus the pre-agreed 2% service fee.

The short-term trade financing loan is now paid off and there are no long-term repayment plans or obligations that could affect ABC Supplier’s credit score.

 

How does invoice discounting work? 

A typical invoice discounting agreement includes the following steps:

  • A business sells goods or services to a buyer and raises an invoice – often with deferred payment terms up to 120 days.
  • The business needs immediate access to working capital so submits the invoice to an invoice discounting provider, applying to it as security against a short-term loan.
  • The invoice discounting provider evaluates the invoice and creditworthiness of the buyer and agrees to advance up to 95% of the value of the invoice immediately as a short-term loan, in exchange for a small fee – typically 1-3% of the loaned amount.
  • The buyer pays the invoice within the agreed 120-day window.
  • The business pays back the loaned amount to the invoice discounting provider, plus the pre-agreed service fee. 

 

What are the benefits of using invoice discounting? 

Invoice discounting facilities provide plenty of benefits for small- and medium-sized businesses. Some of the key benefits include:

  • Immediate access to finance that would otherwise be tied up for as long as 120 days. This frees up working capital to invest in other areas, including paying the business’ own suppliers or simply investing in growth. 
  • Businesses are more likely to be approved for invoice discounting than for bank loans as financing decisions are based on their accounts receivable (i.e. owed income) rather than profit projections or forecasts that can often disqualify smaller businesses for traditional loans.
  • Discounting can be more affordable than a bank loan, with small pre-agreed fees of around 1-3% of the loaned amount instead of long-term, high-interest repayment plans.
  • Invoice discounting acts as a short-term loan because finances are only qualified against specific invoices. As soon as these are repaid, the loan agreement is settled and there are no long-term repayment terms.
  • Invoice discounting is usually confidential and, unlike factoring services, the business’ buyer does not have to know it is using an invoice discounting company.

Is invoice discounting right for my business? 

Many businesses benefit from invoice discounting services – especially those that regularly work with deferred payment terms. Invoice discounting may be right for your business if:

  • The business is looking to invest in rapid growth and needs working capital to fund it. It can’t wait up to 120 days for payment as it needs to finance new equipment, facilities or even hire staff to support growth.
  • The business is struggling with cash flow and needs to pay its own suppliers to avoid late payment charges. Invoice discounting frees up working capital to cover accounts payable.
  • The business is unable to qualify for a traditional bank loan without accepting extortionate fees and long-term repayment plans. Businesses are more likely to qualify for invoice discounting than bank loans as they can use their accounts receivable as proof of owed earnings.

If your business needs access to immediate working capital for any of the above reasons, consider applying for financing with Stenn today.

 

Why partner with Stenn?

Stenn provides invoice financing services – giving SMEs the working capital needed to pay their suppliers and invest in growth. So, it’s no longer necessary to wait up to 120 days to receive payment for invoices.

Plus, our application process is completely online and requires only two documents to be signed. Funds are delivered within 48 hours of a successful application.

But don’t just take our word for it, here’s what our customers say:

“We are very much happy with the Stenn service. Everything is fast, and everything is dealt with in a professional and proactive manner.” 

Ramji Lal – Oren Hydrocarbons

 

Frequently Asked Questions (FAQs)

What is confidential invoice discounting? 

Confidential invoice discounting refers to an agreement in which a business’ customers are not made aware that it is using a financing provider.

The downside to confidential invoice financing is that the business remains solely responsible for chasing customers for late payments. In other financial agreements, such as invoice factoring, the financing provider often assumes responsibility and costs for chasing the customer for payment.

 

What is selective invoice discounting?

Selective invoice discounting refers to an invoice discounting service in which a business agrees to select specific invoices to submit for finance – rather than its entire accounts receivable.

The advantage of selective invoice discounting is that it allows businesses to access enough immediate working capital to fund their short-term plans without accruing service fees to the value of their entire accounts receivable.

 

What is the difference between factoring and discounting? 

Invoice discounting and invoice factoring are similar in that they both involve businesses using their accounts receivable as leverage to secure short-term financing.

The main difference between the two financial services comes in who is responsible for chasing late invoice payments. In an invoice discounting agreement, the business typically maintains full responsibility for chasing late payment. However, in a factoring agreement, the finance provider often assumes the responsibility and costs for chasing late payments. 

For more information on invoice factoring, read our dedicated guide.

 

To find out more about invoice financing services and how Stenn can support you in accessing immediate liquid capital today, view our additional resources or contact our friendly team today.

 

About the Authors

Stenn is a registered member of the ITFA, IFA and WOA. It has financed invoices worth over $7 billion (USD) to date and provides:

  • An online platform for easy applications.
  • Non-recourse factoring (i.e. full protection against non-payment of invoices).
  • Rapid assessments (usually within 15 minutes).
  • Cash advances within 48 hours, with only two documents to sign.
  • Advances of between $10K (USD) to $10M (USD).
  • Fees that begin at 0.65%.
  • Advances on international deals that other companies and banks can’t, or won’t, finance.
  • Services in 74 countries.
  • Reverse factoring (buyers can use Stenn to pay immediately and settle the invoice later with us).

This article is authored by the Stenn research team and is part of our educational series.

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Disclaimer: The above article has been prepared on the basis of Stenn’s understanding of current invoice factoring. It is for information only and doesn’t constitute advice or recommendation. Whilst every care has been taken in preparing this article, we cannot guarantee that inaccuracies will not occur. Stenn International Ltd. will not be held responsible for any loss, damage or inconvenience caused as a result of anything published above. All those applying for credit should seek professional advice when doing so.