If a company already practices sound credit management, and has the staff and systems to generate rapid customer collections, some of the Factor’s skills will not be required. However, there may still be a need to turn debtors into cash more rapidly and generate working capital from the sales ledger balance.
Invoice Discounting is the ideal solution for this scenario. Immediate cash is available for up to 80-85% of approved invoices. However, responsibility for the sales ledger operation remains with the company’s organization. The service is usually offered on a confidential basis without disclosure to debtors. Payments for outstanding invoices are paid into a bank account administered by the Invoice Discounter, after which the company is credited with the balance less charges.
The administration charge may be a flat monthly fee or a percentage of turnover. A facility offer will take the form of a formal quotation after the Invoice Discounter gains an understanding of the business requirements. As in the case of Factoring, for finance provided in advance of collections there is normally a discount charge calculated on the day-to-day usage of funds. Again, it is likely to be comparable with normal secured bank overdraft rates.
Invoice Discounting started in the eighties in the UK and is today offered in most of the mature markets of the EU.