Did you know the word “invoice” originates from the French word “envoyer” which means “to send”? The idea of keeping track of goods and services delivered has been around for nearly 5,000 years and today businesses worldwide send around half a trillion of invoices a year.
Nowadays invoices can be more than just a document to demand payment though, they can become a financial instrument through invoice discounting.
In the following we’ll explain you everything you need to know about the most common forms of invoices and how discounting them can help with your cash flow and overall finances.
In a transaction where both parties are registered for VAT, the vendor is required to issue an invoice to their customer.
The invoice has to include
The invoice described above is a standard invoice, typically used for standard transactions in industries such as retail, wholesale and agriculture.
However, there are other forms of invoices used for different kinds of products and services.
The most common ones are:
Find out more about the different forms of invoices here.
It should be noted that no matter its form, an invoice is not a receipt. A receipt is an acknowledgement of payment whereas an invoice states an amount owed to the drawer.
Invoice discounting is a service offered by banks or financing firms that allows the drawer of an invoice to receive their funds before the invoice’s due date. Sometimes the service also includes the collection of the receivables discounted.
Invoice discounting aims to help with liquidity and cash flow problems.
The finance provider advances up to 90% of the invoice face value to the creditor once the invoice is issued. When the invoice gets paid into the finance providers account after the payment terms have passed, the creditor receives the remaining value of the invoice minus any fees and interest.
The service solves liquidity troubles by giving the invoice itself a value before the collection date. It ensures the drawer fast access to the cash tied up in the invoice and eliminates the possibility of late payments.
Invoice discounting is especially interesting to small and medium enterprises (SMEs) due to their frequent cash problems and difficulties to access other forms of short term finance.
There are two options when it comes to invoice discounting: Discounting with or without recourse:
Discounting with recourse
In this case the issuer of the invoice remains liable for defaulted debts. When an invoice remains unpaid and it becomes impossible to collect payment, the issuer of the invoice will have to refund the cash that was advanced for the invoice.
It is usually cheaper to choose this option as the finance provider is not taking on the risk of default.
Discounting without recourse
In an agreement without recourse, the finance provider is accepting full liability for any non-payment of debt. The risk taken on is reflected in higher prices and lower advance rates.
Invoice discounting is basically a simple, trouble-free way to improve cash flow without taking on additional debt.
Sounds good? So who should you be discounting with? Traditional banks or alternative finance providers? We tell you the most important differences between the two so you can make smart comparisons and find the finance that suits your needs best!
Alternative finance entities are usually much faster than banks in carrying out processes, especially fintech (“financial technology”) firms as technology allows them to automate processes to increase speed.
Furthermore, many non-bank invoice discounting providers are specialised in the field with a focus on agility and personalisation.
Alternative finance providers generally focus on your clients’ creditworthiness rather than your own whereas banks only look at your credit rating. So if you are an SME supplying to large, reliable companies, alternative finance will make you a more cost effective offer since it takes into account how stable your debtors are.
Moreover, banks always require collateral, debentures or personal guarantees whereas alternative finance providers do not.
On the other hand, receiving finance from banks does have advantages, too. As the large entities that they are, they are able to offer many complementary services and they accept a larger range of firms taking on more risk. For larger firms, their offers are often more suitable than alternative finance options.
However, for smaller firms they are often rather expensive and impose complicated fee structures involving four or more fees, some of which remain hidden. Alternative finance providers are normally more transparent in their fee structures and only apply one interest rate and one operations fee to keep things simple for their clients.
Do you have any questions about the process of invoice discounting or do you already have invoices you would like to discount? Get in touch with us at Novicap and one of our advisors will explain everything you need to know answering all questions you may have. Give us a call!
And if you found this article useful, feel free to share it on Twitter, LinkedIn or Facebook to help others!
VISIT OUR FAQ PAGE AND EXPLORE ALL THE ANSWERS ABOUT NOVICAP YOU ARE LOOKING FOR