Invoice Discounting

Invoice Discounting is usually used to describe a confidential factoring facility, where the client manages their own sales ledger.  The client continues collecting payments direct from their customers who remain unaware of the facility. Available only to financially stronger clients with effective sales ledger and credit control systems, as the factor has no contact with the customers.

Invoice Discounting Advantages

• The fact that customers are not involved in the facility is seen as an advantage by many prospective users. 
• As there is no service element, the cost of a facility is very much cheaper, and so appeals to companies who already have the staff and infrastructure in place to effectively manage the sales ledger and collections function.

Invoice Discounting Disadvantages

• Requires attention-to-detail in administering the facility - penalties for mistakenly paying a customer receipt into your own bank account rather than the factor's can be severe.
• Factor will require access to staff for a brief audit, usually quarterly.
• Most factors require that your sales ledger movements be reconciled monthly to their control ledger, which can be an administrative burden at month end.

Typical Invoice Discounting Costs

• Service Charge - likely to be between 0.1% and 1% of VAT inclusive turnover.
• Finance Charge - funds advanced (you do not have to draw down all the available sum from your invoicing, only what you require), is likely to be between 1.5%-3% over bank base rate. This will be a lower rate than today's typical overdraft or business loan.
• Bad Debt Protection - around 0.5% (calculated on only the insured portion of pre-vat sales).