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Invoice Discounting Definition

Invoice discounting can simply be described as the provision of finance against unpaid invoices. The finance provider will take security over the book debts of the business by registering a debenture over the business. Traditionally the invoice discounting company will release between 75-85% of unpaid invoices of up to a 90 day period. Invoice discounting is usually confidential in that your customers are unaware that you are discounting your invoices. This is different from factoring whereby your customers are aware that you are raising cash against your invoices.

The criteria for obtaining an invoice discounting facility is higher than a  factoring facility and the decision of the invoice discounting facility will be influenced by

1.  the business should be able to demonstrate that they are trading profitably and that there is a reasonable net worth. The last set of audited accounts and most recent management accounts will be required to evidence a profitable well run business.

2. the lender will pay particular attention to the quality and spread of your customers. Ideally no one customer should account for more than 20% of turnover. There are a number of invoice discounting companies providing single debtor invoice discounting however it depends on the risk of that particular customer and whether credit insurance is available.

3. you must be able to evidence that a good credit control system is in place and that the turnround of issuing an invoice to receiving  payment is done in a timely manner.

4. In addition a good sales ledger must be in place, ideally be computerised and adequately kept up to date.

As we have previously mentioned not all invoice discounting companies are the same. Every lender has a sweet spot. A good invoice discounting broker will be able to recognise which finance company will best suit your particular requirements. The introduction will be based on the length of time the business has been trading profitability, spread of and quality of the debtor book and geographic location.


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XL Business Finance Ltd is a privately owned and independent business financing company with established links to many of the UK's leading finance houses. XL Business Finance provides a viable alternative to high street banks that lack the flexibility and imagination to provide a solution to most business users requirements. XL Business Finance can provide a full range of business financing solutions and we ensure a high level of customer service and pride ourselves on quick decisions. Our independent status will ensure any offer of funding and asset finance leasing is best suited to our customer’s needs.

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