The premise is simple – upon you issuing an invoice to a customer, a pre-agreed percentage of this amount is advanced to you by the invoice discounting company.
In this way, invoice discounting works on a similar premise to invoice factoring; however the main difference between the two is that with invoice discounting, you maintain full control over collecting the outstanding amounts from your clients.
As there is no third party involved in the collection of payments, nothing will change from the point of view of your customers. This is important for some business owners as this ensures communication between your company and your clients is kept strictly between the two of you without any involvement from an outside party. Your customers would also remain unaware that you have entered into an invoice finance agreement.
However, this also means that you retain responsibility for ensuring your accounts receivable are paid; sometimes the intervention of a third party can spur slow payers into action.
Interest will be charged on the amount advanced to you by the invoice discounting company; therefore you should only see this form of lending as an option if you are confident that your customers will settle their invoices in a timely manner, as the longer the invoice remains unpaid, the more interest will accrue on the loaned amount.