Money
Issue No. 19 - October/November 2004
Invoice Discounting
Bold to Beautiful
by Mark Day
Mention the term invoice discounting ("discounting") only three years ago and the response from the average business person would probably have been negative.
Connotations such as “lender of last resort funding”, “exorbitant fees”, “business in downward spiral” would have been common and, in cases, well founded.
The significant advantage of this form of financing over traditional bank funding was that the financier generally "advanced" 80% and for some 90% of the face value of the debtors as opposed to traditional bank funding which would lend around 50% of the face value of debtors. This meant that for high growth companies with poor balance sheets, the funding could grow with a company‘s sales.
Discounting is also sometimes referred to as bulk discounting, receivables financing, invoice factor finance ("factoring").
The main difference between factoring and discounting is that with factoring, the factor (the lender) is the contact point with the debtor. Discounting, on the other hand, is generally "non-disclosed" and the company retains all contact with its client in the accounts receivable process. Only in the event of the financier requiring to realise its security would the debtor have any idea that the company was utilising this form of finance.
Simply, the product operates as follows: The borrower agrees to assign its book debts to a Discounting company or bank. In exchange, the lender agrees to advance, on receipt of an "approved" invoice, up to 80% (or more) of the face value of the receivable to the company. Receivables may be domestic or offshore. Generally, funds are advanced within 24 hours of presenting the invoice. The balance - less fees - is paid after a set term, or when the debtor pays.
What generally happens is that when an invoice is issued, a copy of that invoice is sent to the bank which (as long as it has "approved" the debtor) immediately increases the pool of funds available for dr...
