What Are the Advantages and Disadvantages of Invoice Discounting?

By providing businesses with a ‘boost’ or ‘injection’ of cash, invoice discounting allows enterprises to leverage their accounts receivable and continue cashflow - without notifying their customers. In this article, our expert team will explore the many invoice discounting advantages and disadvantages, so you can decide if it’s the right choice for your business. 

To find out more about how our invoice finance solutions can ensure your cash flow continues despite late payments, get in touch with Time Finance today. With optional Selective Bad Debt Protection and XTRA Time facilities to help you access additional funding on top of your existing agreement, we offer flexible support that doesn’t just boost your cashflow - but gives you confidence in your finances.  

Pros and Cons of Invoice Discounting: At a Glance

There are many advantages of invoice discounting, including:

• Early release of funds
• Disclosed and confidential transactions
• Increased business opportunities
• Protection against bad debts

There are some small disadvantages of invoice discounting, for example: 

• The facility is subject to fees
• You may be liable if your customer doesn’t pay their invoice
• Invoice Finance providers will undertake a credit check on your business, which may affect your credit rating
• This solution isn’t ideal for businesses of a smaller nature

Advantages of Invoice Discounting

Late invoices are one of the biggest threats to survival faced by businesses in the UK, with last year seeing late payments hit a three-year high. Subsequently, SMEs turn to invoice discounting for extra support whilst awaiting payments to come through.

Early Release of Funds

Invoice discounting allows enterprises to access funds that are locked in unpaid invoices ahead of time, preventing cashflow from coming to a halt. Since invoice discounting providers typically assess viability quicker than banks, businesses can receive up to 90% of the outstanding invoice value within 24 hours. This gives invoice discounting significant speed advantages over more traditional finance options.

Disclosed and Confidential Transactions

Maintaining customer relationships is a key part of business success - and many companies are concerned that revealing their need for a cash ‘boost’ may damage this. However, invoice discounting does not alert clients that you’re using an invoice finance provider, so confidentiality is maintained.

Increased Business Opportunities

The ability to pay suppliers early, or invest in business expansion is another attractive aspect of invoice discounting. As such, many enterprises use this type of invoice finance strategically to fuel their growth without needing to rely on customers for payment.

Protection Against Bad Debts

Confidential invoice discounting can also help enterprises avoid bad debts, another difficult challenge faced by British businesses. At Time Finance, we offer optional Selective Bad Debt Protection (BDP) to mitigate this risk. Since BDP is provided on a selective basis, businesses can choose which customer they want to cover - staying in control of the process at all times.

Disadvantages of Invoice Discounting

There are also some small disadvantages to consider when it comes to invoice discounting. Searching for a trusted provider that offers a high level of support, like our team at Time Finance, will ensure you find the best arrangement for your business. 

Fees 

Finance providers charge businesses a fee for utilising their invoice discounting facility; these fees will be discussed upfront and listed as part of the agreement undertaken with the provider. This charge can however be counterbalanced by business growth opportunities gained with early access to locked funds. 

Several factors determine the cost of your invoice discounting loan:

• Size of business turnover 
• Value of invoices to be discounted
• Whether you choose selective or whole invoice discounting 
• Length of the loan
• What business sector you’re in 
• External factors, i.e the current Bank of England base rate

Liable for Unpaid Invoices 

Whilst it is unlikely, if a customer whose invoice you have put forward to be funded via invoice discounting, fails to pay the invoice, you may be liable. This is because the funder has provided you with the agreed prepayment value (ranging from 75%-90% of the value of the invoice).

Credit Checks 

As with all business finance lenders, it is necessary to undertake credit checks. If a business has investigated a number of funding solutions it may be that credit checks have been performed. If this is so, those checks provide a ‘footprint’ and may affect your credit rating in the future. 

Not Ideal for Small Businesses

Invoice discounting can help businesses feel in control of their finances when payments are delayed. However, if you are a business that is turning over less than £100,000 per annum, the cost of using this type of facility will far outweigh the benefits. For smaller businesses, using Selective or ‘Spot’ invoice finance may prove to be more beneficial.

If you’re unsure that invoice discounting is right for your business, contact our expert team who can guide you through our other finance solutions, like ABL finance and Asset Finance. 

Why Businesses Should Consider Using Invoice Discounting

Phil Chesham, Managing Director of Invoice Finance at Time Finance, shares his thoughts as to why businesses should consider using this type of invoice finance:

“Invoice Discounting is a useful funding solution for businesses who wish to continue managing their own credit control function. Many businesses struggle with cash flow and this is due to the time it takes for invoices to be paid. Using invoice finance will help to unlock cash tied up in unpaid invoices, and release much-needed cash back into the business. 

“Utilising the assets already within the business allows SME owners to access finance without resorting to additional loans, credit cards or overdrafts”.

Reap the Benefits of Invoice Discounting with Time Finance 

We know that funding can mean the difference between your business growing or standing still. Our invoice finance solutions give enterprises access to additional working capital when they need it, so they can continue to make the most of every opportunity that comes their way. 

To find out more about how Time Finance can help you get the finance you need to succeed, get in touch today.