10 common myths about Invoice Discounting


1. Only companies who are in financial trouble use Invoice Discounting

Invoice Discounting is one of many financing options for business, and when used appropriately is a valuable cashflow management tool. The existing $60bn market is testament to the value and flexibility of Invoice Discounting.

Invoice Discounters don’t advance funds to businesses which are failing – rather advances are provided to cover temporary cashflow gaps experienced by healthy businesses that can service and repay the advance.

2. Invoice Discounting is expensive

Some providers are indeed expensive, particularly incumbent “old school” providers. However the new wave of online providers will employ forward looking, risk adjusted pricing which results in pricing which is very competitive with comparable alternatives.  Additionally online providers will not charge fees, or only minimal fees to cover costs.

3. Invoice Discounting is complicated

The concept behind Invoice Discounting is straightforward – funds are advanced against the value of the outstanding invoices of a business. While in practice some providers might make it seem complicated, at its core Invoice Discounting is quick and easy.

4. Invoice Discounting locks you in for an extended period

An Invoice Discounting advance is in place for the term of the underlying invoice – this could be as little as 30 days through to 90 days. Most providers will not accept invoices with terms over 90 days.

5. Your customers will find out you’re using Invoice Discount finance

Invoice Discounting advances may be made on a disclosed, or undisclosed (confidential) basis.

A Disclosed advance or facility is one where the debtor is advised that the invoice proceeds will be collected by a third party (ie the provider). In this case the payment for the invoice is made to a separate Bank account controlled by the provider.

An undisclosed facility on the other hand is one where the debtor is not informed that the invoice has been funded, and where existing invoice payment arrangements are not changed.

6. You have to hand over control of your customers

Not necessarily. Many online Invoice Discounting providers will not assume management of your receivables ledger.

7. You need Property Security to use Invoice Discounting

No. One of the biggest advantages of Invoice Discounting over other forms of financing (such as Bank Overdrafts) is that Property Security is not required.

8. Our company is too small or hasn’t been in business long enough

Not necessarily. While the old school providers may decline businesses based on black and white rules such as turnover or time in business, online Invoice Discounting providers consider the business on its merits, including current and future performance.

9. You need to change Bank Accounts to use Invoice Discounting

Not necessarily. While many providers will require invoice payments to be made into a separate bank account (requiring you to change your debtor’s payment instructions), online Invoice Discounters may not share this requirement.

10. Invoice Discounting and Factoring are the same thing

Invoice Discounting and Invoice Factoring are often thought of as being the same thing, however in reality they are very different.

Invoice Discounting is simply a form of loan where funds are advanced against the value of outstanding debtor invoices. The finance does not impact on the business and is confidential.

Invoice Factoring is in effect the sale of your receivables (ie debtors) ledger to a third party (called the factor) who then assumes the management of the receivables including collecting payment, chasing up payments and so on. For this reason your debtors (ie customers) will be aware of the arrangement.