Understanding Invoice Discounting
Invoice discounting is a specific type of short-term finance that allows businesses to access the cash owed to them by customers. This alternative type of funding solution lets businesses sell their unpaid invoices to receive cash now instead of waiting for customers to pay their invoices.
Many businesses extend credit terms to their customers, issuing invoices that allow customers 14 or more days to pay their bill. However, some customers may take 30, 60 or even 90 days or more to pay the amounts they owe. During this time, the business can end up with tens of thousands of dollars owed by customers in unpaid invoices.
Instead of applying for an overdraft or an unsecured loan to cover cash that is already owed by slow-paying customers, businesses have the option of using invoice discounting or invoice factoring. The amounts owed on unpaid invoices could be forwarded within 24 hours of approval, giving the business access to the cash they need right now without having to go into debt to receive it.
If a business needs access to cash flow, it’s possible to sell unpaid invoices to a third-party lender in return for a cash payment. The lender advances a percentage of the amount due based on the value of the invoices, effectively unlocking cash sooner rather than waiting for customers to pay their bills.
It’s often not necessary for a business to put up collateral to secure the loan. Instead, the lender uses the unpaid invoices on a business’s accounts receivable as collateral security for the amount funded.
How Much Does Invoice Discounting Cost?
An invoice discounting lender may advance an agreed percentage of the invoice value within 24 hours of approval. The business then chases the customers to pay their invoice. When the customer pays the amounts owed, the business repays the lender.
As the business is following up any unpaid amounts due with customers, they usually have no idea about the invoice discounting arrangement in place. By comparison, some types of debtor finance, such as invoice factoring, may involve the lender following up with customers to receive payments.
Benefits of Invoice Discounting
Many businesses may find that invoice discounting offers a more cost-effective alternative to applying for expensive overdraft facilities or unsecured loans with traditional lenders. Instead of paying interest charges or application fees on the amount funded, the business pays the lender a small percentage of the invoice value, which is known as the discount fee.
The business avoids the need for expensive debt options and it also has access to cash owed to them by customers sooner without having to wait for those customers to pay their invoices over a period of time. There’s also no need to provide physical collateral to secure the loan, as the lender uses the invoices on the business’s accounts receivable as security instead.
What is the Difference Between Invoice Discounting and Invoice Factoring?
With invoice factoring the financing company—factor—works with your customers for payment of their invoices. With invoice discounting, your business is left with the responsibility of chasing customers for settlement.
The invoice factoring company pays you a percentage of the total outstanding invoice amount upfront—anywhere from 80-95%. Once the factor collects the full amount, they then pay you the balance owed minus their factoring fee for their service. Universal Funding’s rates start as low as 0.55%.
If invoice factoring is a solution you’re considering to help unlock your business’s cash flow, contact our factoring specialists today by calling 800.405.6035 or filling out our rate form. We’ll work with you to discover the financing solution to suit your specific business needs.
About Universal Funding
Universal Funding is a private funding source that has funded thousands of businesses and more than $2 billion since 1998. We turn your accounts receivable into the funding you need through invoice factoring and can have working capital in your hands in a matter of days.