Invoice Discounting

Invoice Discounting is similar in principle to factoring, in that sales invoices are ‘assigned’ or sold by a business to an Invoice Finance company in exchange for an initial advance of up to 90%, with the balance payable (less the invoice discounting company’s charges), when the debtor settles the invoices in full.

However, unlike factoring, the Invoice Finance company does NOT manage their client’s sales ledger on a day-to-day basis – instead, they trust their client to manage the sales ledger themselves and provide them with sales ledger information on a monthly basis. However since this involves a theoretically higher risk, Invoice Finance companies have much stricter criteria in determining those for whom they will provide invoice discounting services.

Typically, therefore, Invoice Finance companies will be seeking:

• Well established businesses that have been trading profitably for at least two years and have retained assets on their balance sheet
• Business that can demonstrate good sales ledger management systems and are able to produce required monthly information

If a client business does not meet these criteria but still wishes to undertake Invoice Discounting, then the Invoice Discount company is likely to require additional security, such as a charge on property.

In recent years, Invoice Discounting has become more popular than factoring because of:

• Lower costs – administration charges (as a percentage of the invoice value) are lower than factoring charges, because the Invoice Finance company is not managing the sales ledger
• Greater confidentiality – Invoice Discounting is provided on a confidential basis, so debtor customers will be unaware of the relationship between the creditor business and the Invoice Discounting company

Since the landmark Brumark legal case in 1999, Invoice Discounting has become more popular than traditional bank overdrafts as a means of providing finance for purposes such as company acquisitions, Management Buy-Outs and Management Buy-Ins. Consequently there are now many major companies using Invoice Discounting as their main source of day-to-day working capital.

BTG Commercial Finance has excellent relationships with leading UK Invoice Discounting companies, and we pride ourselves on arranging introductions that will benefit all parties.