- 18 Mar
The Pros And Cons Of Invoice Discounting For Businesses Considering Using Invoice Discounting
I recently published a list of the pros and cons of factoring and so to complete the record I thought I would also publish a list of the pros and cons of invoice discounting for the benefit of any businesses that are considering using invoice discounting. Many pros and cons are similar for factoring and invoice discounting but there are some subtle differences:
PROS OF INVOICE DISCOUNTING
- Improved business cash flow & cash lump sum released - when you first start using invoice discounting you can release a large proportion of the cash that is tied up in your unpaid sales invoices.
- Funding grows with your business - the more invoices you raise the more funding is released unlike a traditional bank overdraft or loan where the funding is a stated amount. Hence the funding from invoice discounting grows with your business.
- Protection against bad debts (optional) - many invoice discounting companies offer protection against bad debts (non recourse invoice discounting) as an option.
- Confidentiality - invoice discounting is often available on a confidential basis so that your customers are not aware that you are using an invoice discounting facility.
- Control of customer contact - with invoice discounting you retain the credit control and invoice collection function for your business in-house, so you remain in control of the contact with your customers.
CONS OF INVOICE DISCOUNTING
- Cost - there is a cost to use an invoice discounting service. Having said that you can shop around to find the best deal for your business. You can also offset the cost against having improved cash flow which can mean being able to demand discounts from suppliers.
- Minimum charges - some invoice discounting facilities will have minimum monthly or annual charges. These vary dramatically between different providers and there are also specialist invoice discounting facilities that do not require you to pay any kind of minimum charge and still alow you to collect your own invoices.
- Security requirements - additional security such as personal guarantees may be required. Some invoice discounters may be prepared to limit these substantially.
- Contract length & being tied in - many invoice discounting companies will require a minimum contract length and lengthy notice periods. Again this is not universal and you need to shop around. Some invoice discounters offer very short notice periods for termination of the facility.
- You don't have help collecting your sales ledger - unlike factoring, invoice discounting does not provide you with a credit control function to help you collect your unpaid sales invoices.
- Set up process - in some cases the set up process for invoice discounting can be lengthy and complicated. Again this is not universal and there are siginifcant difference between different invoice discounting companies.