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One of the biggest issues facing lots of small, medium and even bigger businesses at the moment is cash flow. So how do we keep the cash flow moving? Invoices are taking longer and longer to be settled and while overheads remain constant, those checks just aren’t coming in as quickly or as regularly as they should be. This can put a huge strain on a business, especially when you have wages and rent to pay at the same time every month. Cash flow problems are a reason many start ups fail in the first year of trading, as they just don’t have enough cash to keep themselves afloat when clients are late paying invoices.
One of the quickest ways of overcoming this problem is to sell your invoices on to a third party – a practice known as invoice finance. As soon as your issue an invoice, you’ll receive an agreed percentage immediately from the funder. The rest, minus a small admin fee, will come once your clients pay in full.
Invoice finance can be split into factoring and invoice discounting for businesses. Here we’re going to focus on exactly what is meant by invoice discounting.
What is invoice discounting?
If you choose invoice discounting over factoring, this means that you will retain control over your sales ledger meaning that the job of ensuring your clients pay the invoices will rest with you. This enables you to keep your invoice finance agreement with the third party funder confidential from any dealings you have with your clients. It also helps you to work and build on your business relationships with your clients. Many industries that provide services rely on factoring and even truckers use freight bill factoring services.
Factoring on the other hand puts the control of your sales ledger in the hands of the factoring company.
What are the advantages of invoice discounting?
The main advantages of invoice discounting and factoring rest with the constant stream of cash flow you’re able to receive, as and when you issue invoices. For many small and medium sized enterprises this is the boost they need to stabilize their operation before looking to grow and expand.
As the business starts to increase and more invoices are issued, the more funds will become available through invoice finance. This type of “asset based” finance means that the more your business increases, the bigger the scope of your cash flow, meaning you can rest easy that a steady flow of income is coming into your business.