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Understanding funding options: Invoice discounting and stock finance

 The time when invoice discounting was seen as ‘finance of the last resort’ is well in the past and it is now a mainstream source of finance that often sits alongside other funding options, including debt. In general, for regulatory reasons, and where appropriate, banks prefer to offer invoice discounting rather than overdraft facilities.

How does it work and what are the benefits?

Invoice discounting is readily available and ideal for established growing businesses because it links your sales ledger directly to your credit facility. This means funding grows in direct proportion to business expansion.

Invoice discounting also works well for seasonal businesses because funding mirrors sales. In addition, it has recently become available to a fresh range of sectors, such as particular types of contracting businesses, that were previously excluded.

Why might it not be the solution for your business?

This type of funding may be expensive in terms of interest and bank charges depending on the nature of the business. However, if you use the funds to grow your business, it may be possible to get discounts from suppliers, for early payment, that would go some way towards outweighing these funding costs. Invoice discounting is not normally available to start-ups, although lenders are prepared to offer factoring facilities to new businesses. Unlike invoice discounting, factoring is not confidential, so your customers are aware that you are using the facility.

Assessment

This is a widely used source of finance in a highly competitive market that delivers flexible funding. It’s extremely well suited to fast growing businesses.

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