Invoice discounting is an opportunity to better manage your business’s cash flow by selling unpaid invoices to a lender. In a nutshell, you’ll sell all your unpaid invoices to an investor who will provide a cash advance in return, for a percentage of the invoice’s total amount. Once the invoices have been paid by your customers, you’ll receive the remaining balance, minus the lender’s commission for advancing the money.
As with any form of lending, it comes at a price. There are two main costs involved with invoice discounting – the service fee, and the discounting fee. There can also be other charges, like a termination fee, but these will vary between individual lenders and based on your own business’s circumstances.
This is the cost of having the credit agreement in place, and will cover the administration and management of your account. Often, the service fee is calculated as a percentage of your turnover, and as turnover changes this fee could change too.
Similar to the interest on a loan, the discount fee is to cover the cost of borrowing. This will generally be a small percentage of each invoice that you receive an advance for. The discount fee can also be affected by how long it takes your customers to pay their outstanding invoices.