Invoice discounting is a financial service in which a provider lends cash to a company up to the value of its unpaid invoices.
Many international Suppliers work with deferred invoice payment terms - often up to 120 days - which can put a strain on their finances. Many Suppliers also struggle to qualify for bank loans to ease their cash flow due to having a short or poor credit history.
However, a Supplier can apply for invoice discounting from lenders that will accept unpaid invoices (accounts receivable) as proof of money owed. The lender will advance money to the Supplier and use the invoice(s) as collateral. On the due date, the Buyer settles the invoice and the Supplier returns the borrowed amount to the lender and pays a pre-agreed service fee.
A typical invoice discounting agreement includes the following steps:
ABC Supplier Ltd exports goods worth £10 000 (GBP) 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 bills so it submits the unpaid invoice to an invoice discounting provider as proof of owed income.
The invoice discounting company agrees to provide ABC Supplier with 95% of the invoice value immediately – totalling £9 500 (GBP) – in exchange for a fee of 2% of the lent amount when the invoice is paid. This fee will amount to £190 (GBP).
XYZ Buyer pays the total £10 000 (GBP) 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.
Invoice discounting provides plenty of benefits for small- and medium-sized enterprises (SMEs). Some of the key benefits include:
Suppliers working regularly with deferred payment terms can benefit from invoice discounting. It might also be a good choice for any Supplier experiencing:
What is confidential invoice discounting?
Confidential invoice discounting refers to an agreement in which a Buyer is not made aware that the Supplier is using a financing provider. This is good for Suppliers that want to maintain existing relationships with Buyers without drawing attention to their use of a third-party lender.
The downside to confidential invoice financing is that the Supplier remains solely responsible for chasing Buyers for late payments. In other financial agreements, such as non-recourse invoice factoring, the financing provider often assumes responsibility for chasing the Buyer for payment.
What is selective invoice discounting?
Selective invoice discounting means that a Supplier selects specific invoices to submit for finance, rather than financing its entire accounts receivable ledger.
Selective invoice discounting allows a Supplier to access the working capital it needs at any time. Selective discounting also keeps fees to a minimum.
What is the difference between factoring and discounting?
Invoice discounting and invoice factoring are similar but the main difference is who is responsible for chasing late invoice payments.
With invoice factoring, the finance provider often assumes responsibility for collecting from the Buyer. With invoice discounting, the Supplier typically retains this responsibility.
If you are interested in learning more about the content listed above, Stenn has a dedicated FAQ section where you can find more information about our invoice financing services. We also provide videos which explain the company and the financing process in detail.
About the Authors
This article is authored by the Stenn research team and is part of our educational series.
Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.
Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.
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Disclaimer: The above article has been prepared on the basis of Stenn’s understanding of the subject. 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.