- 21 Jan
What Is Invoice Discounting
This article answers the question "what is invoice discounting?". We define invoice discounting as:
"Prepayments against unpaid receivables".
That is the essence of it, if you have a receivable e.g. a sales invoice on credit terms or an application for payment, and it is unpaid, and the debtor is a business, you can get a prepayment against that invoice. This can range from c. 70% up to 100% of the face value of the receivable.
You can do this for a single transaction, called a selective facility - or for all the transactions on your outstanding sales ledger (called whole or full turnover options).
What Is Invoice Discounting?
So, invoice discounting (also called ID) is prepayments against unpaid invoices and applications for payment. It is one of a family of receivables financing facilities. There are a number of different product variations which are explained in our Receivables Financing Guide.
The key feature of ID is that it allows the user to retain control of their own credit control activities. In some cases the facility can be fully confidential (Confidential Invoice Discounting or CID) such that the debtors are not aware of the involvement of the invoice discounting company.
Some companies prefer this modus operandi as they like to retain control of all communication with their customers. However, these products are not the best fit if you are looking for an outsourced credit control function, in addition to prepayments. In those cases, factoring is a better options (funding plus credit control outsourcing).
ID can come with bad debt protection, as an added extra, or it can operate on a recourse basis. In the case of the later, you assume the risk should customers become insolvent.
These facilities are ideal ways of boosting your working capital position, and improving your cash flow, without having to relinquish any control of your credit control and debtor contact.