Invoice Discounting

The three types of debt factoring include recourse factoring, non-recourse factoring, and confidential or disclosed factoring.

Recourse factoring is the most common type of debt factoring because it is also the least expensive. In this instance, if a debtor does not pay their outstanding invoice, companies buy back these invoices and return the cash advance in full.

On the other hand, non-recourse factoring is when the factoring company assumes all the risk of unpaid invoices. If your customer doesn’t pay, the financier takes responsibility for the loss and cannot ask you for the money back. Since non-recourse factoring entails added risk, the factoring fees associated with this agreement are much higher.

Confidential or disclosed invoice discounting is known as a middle point between invoice factoring and discounting. It’s an option for companies that wish to be discreet about their use of invoice factoring services, but don’t have a strong enough balance sheet to qualify for invoice discounting.

Overall, invoice factoring helps reduce the likelihood of cash flow gaps on your balance sheet. Depending on the payment agreements you have arranged, clients can take anywhere from 30 to 90 days to pay for your goods or services.

A business needs cash in order to survive and factoring can help companies’ cover their costs by advancing cash. Unlike a loan or an overdraft, invoice factoring is more tailored to the financial needs of a business and it won’t take weeks for the financing to be approved.

Invoice factoring is an effective way to plug the cash flow gaps as quickly and effortlessly as possible. This financial service can be up and running in as little as 24 hours, allowing businesses to access cash and pay their contractors on time, every time.

No, it isn’t considered debt because you’re not borrowing additional capital. You’re simply borrowing money that is already indebted to you.

Before you settle the contract, you and the lender disclose what happens if a client doesn’t pay an invoice. Under these circumstances, there are two options you could choose from, either a recourse or non-recourse invoice discounting agreement.

If you opt for the recourse invoice discounting, you will take responsibility for the unpaid invoices of your client. This means you will have to pay back the full amount of the cash that was advanced to you within an agreed period of time.

If you have opted for non-recourse invoice discounting, the liability for unpaid invoices is transferred to the lender. However, some lenders will only take full responsibility for the non-payment if the debtor has declared bankruptcy. Non-recourse invoice discounting is the less popular option because the financier takes a higher risk and therefore the fees for this service are higher too.

Sonovate offers its clients bad debt protection on 90% of their clients’ net invoice value. In other words, your business’s cash flow can remain unaffected in the case that a debtor fails to finance their outstanding invoice.

For example, if you issue an invoice for £10,000, Sonovate will offer protection for £9,000 worth of the debt. However, this bad debt protection only tends to be available to clients whose debtors have payment terms of less than 60 days.

Setting up services is relatively fast in comparison to more traditional forms of financing.

Invoice financing companies can arrange the facility in a matter of 24 hours. Once your sales ledger is approved, cash advances are issued almost instantaneously.

The entry requirements to qualify for invoice discounting are substantially higher than those needed to qualify for invoice factoring.

More specifically, lenders will typically require a business to have a proven history of profitability, as well as a minimum turnover of £250,000.

No, invoice discounting is not currently regulated by the Financial Conduct Authority (FCA) in the UK.

Given that the invoice financing industry is unregulated, businesses seeking assistance should always make sure that their contract outlines all fees and clearly outlines the termination clause.

However, the invoice discounting sector prides itself on maintaining a clear code of conduct that ensures excellent service for its customers. Plus, the regulation of the industry would lead to added regulation costs, which are typically passed on to customers.

Invoice discounting is a viable solution for startups, as long as they meet the necessary requirements to qualify. Startups rely on a steady flow of cash for their survival, therefore invoice financing is a great solution for emerging companies that are in need of capital.

However, many startups might not have large annual turnovers or extensive records of profitability. Therefore, these businesses may be better suited to other forms of invoice financing, such as invoice factoring.

Invoice discounting services are typically awarded to larger, more established, companies because this premium form of invoice financing has higher entry requirements.

To qualify for invoice discounting, most lenders typically require a proven track record of profitability and an annual turnover of at least £250,000.

You also need to prove your company is capable of managing credit collection and has the resources to manage the collection of payment.

Nevertheless, SMEs are excellent candidates for invoice factoring which is a similar form of invoice financing.

Invoice financing services benefit from a much quicker turnaround than traditional financing methods.  Business loans take a long time to be approved and cash advances can take a long time until they appear in your bank account.

With invoice discounting, there’s no need to wait weeks for a qualification assessment and, once you’re approved, the cash is advanced almost immediately. Invoice discounting offers a quick and efficient solution to short-term cash flow problems.

Another difference between invoice discounting companies and business loans is that the former tend to ask for less security compared to more traditional forms of financing.

Banks place a greater focus on your company’s credit history, whereas, invoice financing companies pay more attention to the credit quality of your customers instead. This makes it easier for less established businesses to secure financing.

There are a host of ways that a company can maximise cash flow opportunities via invoice discounting, such as the streamlined invoicing process it facilitates. Invoice discounting ensures that the invoicing process is timely, allowing for increased predictability, flexibility and room for growth. 

Further still, invoice discounting increases monitoring capacity. Specifically, invoice discounting software, such as Sonovate’s intuitive platform, allows businesses to keep a close eye on accounts receivable and implement credit control measures accordingly. 

Ultimately, invoice discounting can lead to enhanced financial stability for a business, particularly when they partner with a reputable invoice discounting provider.

Selective invoice discounting optimises your receivable ledger by allowing businesses to select specific invoices for financial, rather than all. A select approach facilitates more flexibility and control over the financing process. 

By taking on a strategic approach to invoice selection — choosing those with longer payment terms or from slower-paying customers, for instance — businesses can access immediate cash flow without compromising their entire sales ledge.