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Invoice Finance: Invoice Discounting

Invoice discounting is a form of invoice finance where you retain control over your credit control.  With invoice factoring, you hand over invoice collection to a third party who then contacts your customers seeking payment, buy with invoice discounting you look after that part of the business yourself.

If you are a small or relatively new business, and do not have your own credit control staff, then invoice factoring might be preferred over discounting, because with factoring you don't have to worry about your invoices getting paid. The lender will be more aggressive that you are in extracting payment from poor payers, although that might not be beneficial to your company if your slow-paying customers are of particular value to you. 

Invoice discounting is growing in popularity, and offers many benefits such as releasing a large proportion of your invoiced debts (up to 90%) when you need the cash for expansion or even for paying your own bills. You are not only able to plan with the security that the cash will be available as soon as you invoice your customers, but also that you can retain your own debt management system without passing it to a third party who may disallow you from dealing with certain customers.

With invoice factoring you will no longer be able to offer extended credit terms to customers who are your personal friends and have known for years:  unless they pay right on time, the lender can place them on an exclusion list. Not only that, but your customers will soon find out that you have hived off your collections to a third party. With invoice discounting your customers will be unaware of the lender and you can retain your apparent financial standing. You will be able to take whatever credit control action you feel appropriate without interference from the lender.

Certainly, there are types of invoice factoring that will also permit this, but with invoice discounting you can be sure of it. Not only that, but if you opt for the non-recourse form of discounting you don't have to worry about customers refusing to pay, going into administration or simply going out of business without settling their invoices.

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However, because your lender is taking that risk, the cost of non-recourse invoice finance is always greater than that of recourse finance where you assume the risk yourself. A danger of the recourse form of invoice discounting is that should a customer fail to make payment, then you have to pay the lender back what was forwarded to you on the strength of the invoice to a particular customer. That could leave you cash-deficient for a while.

So it's a choice you have to make:  accept the higher cost of non-recourse invoice discounting or accept the risk of recourse discounting. The latter is fine if you have funds put aside in the case of such an eventuality, otherwise it could be difficult if the worst happens. The last thing you need is having a large invoice unpaid leading to you having to pay the lender back the 90% cash you have already spent on materials for your next order.

So what will be best for you:  invoice factoring or invoice discounting?  And should it be recourse or non-recourse? There are no simple answers to these questions since much depends upon your company, its size, the way it operates, the type of customers you have and how your cash flow is related to future orders and material acquisition.

However, in general terms, many newer businesses and those too small to have their own credit or collections department, tend to go for non-recourse invoice factoring, where everything is looked after them. Larger, more stable and established businesses tend to choose invoice discounting, where their own credit control staff looks after the chasing up of invoice payments, and they may select either recourse or non-recourse according to how secure they believe their customers to be.

Finally, it should be understood that with regard to invoice discounting, each lender has different conditions, plans and charges, and some might be more suited to your specific needs than others. Some lenders might not accept you dealing with only a small number of customers, or might not be happy about accepting individual customers with large invoices, because they present too much of a risk. Some will impose conditions on your business practices that you will find difficult to accept.

The information given here is general, but for the specific conditions of the type of invoice finance best for you, you should speak to potential lenders to find out how your firm in particular can benefit from the services they offer.

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