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Invoice Discounting: The Basics

Invoice discounting is one of the most popular options for businesses looking for a factoring lender. It offers flexible, accessible funding in a lending environment which doesn’t always make new finance readily available. While government schemes to enrich the culture of lending in the UK are on going, alternative finance is increasingly taking the burden from more traditional forms of lending – and invoice discounting is one of the more widely used options. But how does it work, and is your business eligible?

Invoice finance works in four easy steps:

1) First, you sells your goods or services and invoice your customer. You then release this invoice to your factoring lender.

2) Your lender then pays you an agreed upon advance on the value of the invoice. This is typically up to 90% of its total value.

3) You then chase up your customer for payment as per usual, and then deposit the money into the client acocunt of your factoring lender.

4) The lender then pays you the remaining balance of your invoice, minus a small lending fee.

What are the pros and cons of invoice discounting versus factoring? Factoring is an option that many small businesses take as it offers a full credit control system with the lender chasing up customers. However, if your business is a bit larger, you’ll be able to handle this burden yourself. Many businesses also want to be discreet about their use of factoring services and want to retain control of their customer relations, and so opt for invoice discounting. Another advantage is that invoice discounting often offers a higher advance with a smaller lending fee than factoring does. Though there’s still a cost attached, invoice discounting can be more economical for medium sized businesses with larger turnovers. 

Invoice discounting, like other forms of factoring, is very versatile. You’ll be eligible if you provide sales on credit to your customers – manufacturing, recruitment, or anything in between, however retail businesses are often not suitable. To use invoice discounting, you also need to have a certain level of turnover – while this figure varies, annual revenues of around £250,000 are often required. However, alternative lenders are often more flexible than banks, so even if your turnover is not that high, it’s definitely worth a call – if you need help with business finance, then invoice financing could be able to help.


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