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Bypass the Banks with Invoice Discounting

UK business funding is very reliant on the banking sector to provide finance – around 80% of all credit is supplied by the banks, compared to 20% in the US. With the current economic climate, the banks have become less able to fulfil the needs of many UK small and medium businesses. So, how can UK SMEs bypass the banks and get the funding they need? Invoice discounting is one way of finding alternative business funding.

What is Invoice Discounting?

Invoice discounting is a form of short term borrowing which allows businesses to release cash flow tied up in unpaid invoices. It allows companies to get access to funds which are released from a finance company, using the unpaid invoice as collateral for the financing.

So, how does it work?

We can use an example to explain this. Many supply chains are made up of small and large companies, with the smaller businesses lower down in the pecking order. If a small business supplies services or goods to a larger company, they are often kept waiting for payment. This could be due to the large company wanting to avoid taking chunks out of their profit margin. This is a position where invoice discounting can provide funding for the smaller business at a lower rate than borrowing on an overdraft.

Any invoices that are discounted are done so against the unpaid debt by the big company, so it is a safe lending process for the financing company. The large company can be relied upon for payment – and is seen as far less ‘risky’ than the small business itself. The finance company releases funds for the small company, which means they aren’t left hanging around waiting for the big company to pay.

Invoice discounting can also be used with customers who are yet to pay off their debts to the company. It’s one way for smaller businesses to get their cash flow running properly, without having to take out higher interest loans or overdrafts – which the banks might not grant anyway.

Here at Select Factoring we offer invoice discounting and factoring services that could help your company continue to grow.

 

 

Select Factoring.

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