What Is Invoice Discounting?

It is just true to say that many businesses are not even aware what Invoice Discounting is, never mind how this financial service can help any importing, manufacturing business dealing with the distribution of goods and services.

In this presentation we will just focus on what Invoice Discounting is in the concept of Modern Working Capital Techniques.

To help us we need to understand a few basic terms that are in the glossary below.

Glossary

Invoice: The document that covers the delivery of goods and services to creditworthy buyers as they move from Supplier to Buyer.

Copy Invoice: Is an electronic copy of the Invoice that flows through the Modern Working Capital Management system to create the Working Capital that a Supplier would seek.

The Financier: This could be a Division of a bank or specialist Finance House that provides this kind of finance.

Non-recourse Discounting: Here the Financier takes all the risk in the financing transaction.

With Recourse Discounting:

Here the Financier has the ability, as expressed in the Invoice Discounting Agreement, to seek payment from the Supplier should the Buyer fail to pay the invoice due on the stated date.

Retention Account: This is the amount retained by the Financier as he finances the transaction as a part safety net pending the Buyer paying the amount due. The Retention Amount is repaid to the Supplier, less the Discounting Fee and Interest Due, as the Buyer settles the transaction.

Elements of Cost

The Discounting Fee: The Financier will make a charge in for arranging the Working Capital that is being provided.

The Interest Component: This amount is calculated on the number days that the invoice will remain unpaid at prevailing Interest Rates for transactions of this nature.

These cost elements are not excessive, and the reasons for paying them are far outweighed by the benefits that a business gains in raising Working Capital in this way.

The Procedure

The easiest way to understand the procedure adopted in the process of raising Working Capital in this way is by studying the graphic below and understanding the comments under it:

• The 1st Step is for the Supplier load all his unpaid invoices up onto the system. This is very easy to do electronically today. (In the old days this was a manual clerical chore!)
• The 2nd Step is that a copy of all future invoices that are raised will flow into the Modern Invoice Management System so raising ongoing Working Capital for the business.
• The 3rd Step is that the Settlement Platform contacts the Buyer to ascertain that the invoice is genuine, and due for payment. The Platform also ascertains the date that the Invoice will be paid and the bank current account that will be credited with the amount due. This bank account can, in need be controlled by the Financier.
• The 4th Step is that the Platform after receiving the confirmation validating the transaction then prepares the invoice to be offered to the Financier who can chose whether he wants to finance the transaction or not. In addition, in need, the transaction can be insured.
• The 5th Step – If the Financier decides to finance the transaction he debits the facility account in his books and credits the Supplier with the proceeds of the transaction less the Discounting Fee, Interest and the amount to be withheld in the Retention Account.
• The 6th Step – The Financier now waits for the Buyer to effect payment on the due date to the credit of the bank account stipulated. On receipt of this payment the Financier returns the balance that he holds in the Retention Account to the Supplier that would be less Discounting Fee and Interest charges.
• The 7th Step is to stand and look in awe as to how this Modern Working Capital Management System has worked to provide Working Capital to the Supplier!

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