What is invoice discounting and is it right for your business?

What is invoice discounting and is it right for your business?

Every business depends on a healthy cash flow to stay afloat and operate efficiently. When customers do not pay for goods and services promptly, this puts pressure on the company’s finances, leaving little working capital available for key operational expenses, such as paying employees and suppliers.

A lack of working capital can also prevent a company from reinvesting in its own operations or capitalising on new business opportunities, which can significantly hinder the company’s ability to position itself for long-term growth and success.

What’s the solution?

Invoice financing, available in a variety of forms, unlocks the working capital tied up in a company’s accounts receivable. Instead of waiting 30, 60, 90 or even 120 days for the payments due on credit sales, an invoice financing company can advance working capital against the company’s outstanding debtor balances.

Invoice financing is ideal for any company, large or small, that is struggling to survive due to extended credit terms; or one that is battling to obtain other types of business credit.

Invoice discounting is one approach to invoice financing. The other is invoice factoring. While these funding mechanisms do share some similarities, they are quite different – and it’s important for businesses to be aware of the discrepancies before choosing the most suitable agreement.

How does invoice discounting work?

With invoice discounting, a financial services provider pays a company funds that are secured against the company’s accounts receivable. The company pays a percentage of the invoice amount to the lender as a fee for borrowing the money.

The company remains responsible for collecting payments directly from its customers. It also continues to administer its own sales ledger and manage credit control processes. Customers are usually unaware that there is a third party (i.e. the invoice discounting company) involved.

Is invoice discounting the same as invoice factoring?

    In some ways, yes. But the main points of difference are as follows.

  • With invoice factoring, the company sells its accounts receivable to the factoring company. As part of this agreement, the company hands over its debtors’ book to the factoring firm and its customers are made aware that there is a third party involved. It’s important to choose a well-established factoring company that will liaise professionally with customers and clearly explain the advantages associated with its involvement, dispelling any concerns that customers may have around dealing with a third party.
  • With factoring, the company no longer needs to manage credit control or debtor administration processes in-house. The factoring firm takes over these functions, including checking the receipt and accuracy of invoices, opening new customer accounts, carrying out credit checks and assessing credit limits to mitigate the risk of bad debt, handling collections and payments, distributing reminder letters and final demands as and when necessary, and even providing the company with guidance should it ever need to settle disputed accounts.
Choosing between invoice discounting and factoring

One main point to consider is how much time a company can afford to spend on credit control. For any business owner, the hours spent administering payments and managing credit control processes are not only monotonous and dull, but also hours that are lost to other areas of the business. For example, this time could rather be spent networking with new clients or identifying new business opportunities.

Hiring credit control experts in-house may seem like a smart way to free up more time to grow the business. However, many SMEs lack the resources and expertise to hire, train, manage and retain new employees in this specialised field.

For companies that are facing these challenges, invoice factoring – as opposed to invoice discounting – makes good business sense. With factoring, the company has access to an entire credit control and debtor administration department, all included in the factoring fee.

Why choose Merchant Factors?

Merchant Factors has been providing factoring solutions to growing businesses for almost three decades. The company was founded to offer organizations in South Africa with a sound alternative to traditional bank loans and overdrafts.

Today, Merchant Factors is the leading independent factoring specialist – providing companies with the working capital they need to meet their business goals, as well as a team of expert credit-control professionals that liberate these businesses from having to devote hours and hours to credit control and debtor administration duties.

Merchant Factors’ independence allows the firm to customise its facilities to suit most small and medium size emerging businesses. It is also able to offer the shortest turnaround time in the industry from application to pay-out.

For fast, flexible invoice financing – contact Merchant Factors today.

Finance beyond the Numbers.