Invoice discounting is the ability to raise up to 85-90% of a businesses unpaid invoices. There are approximately fifty or so providers based in the UK all offering a similar service. As explained in other posts not all finance companies are the same and as such great care should be taken when choosing a finance company. Most invoice discounting facilities can be run on line and at the end of the day the client will send a copy of their sales day book to the discounter. The discounter will then make available 85% of the invoices available for draw down by the client. The client runs the sales ledger and collection and makes telephone calls to chase the debt. The client collects payments from their customer and pays the money into a trust account. The discounter collects the funds from the trust account and pays back the remaining fiftenn percent less the charges for running the facility.
There are two main charges in invoice discounting agreements. The service fee is a percentage of the clients turnover for the privilege of operating the facility. These costs can vary between 0.1% -1% of turnover depending on the circumstances of the facility. The second charge is the cost of borrowing the money which is an interest charge for the priveledge of borrowing the money. Charges are usually 1-2.5% over the cost of borrowing. Some providers will link to bank base rate and others will link to LIBOR, which at times can be completely different. In addition some invoice discounting companies will charge a minimum base rate and as such the headline interest rate must be viewed with an air of caution.
If base rates are low as they are now and we are expecting rates to go up a lower add on rate with a higher minimum may be better tan a ower min but with a higher add on.
Tags: invoice discounting
