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.
A typical invoice discounting agreement includes the following steps:
Invoice discounting facilities provide plenty of benefits for small- and medium-sized businesses. Some of the key benefits include:
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:
If your business needs access to immediate working capital for any of the above reasons, consider applying for financing with Stenn today.
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
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.
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.
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.
Stenn is a registered member of the ITFA, IFA and WOA. It has financed invoices worth over $7 billion (USD) to date and provides:
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.