Invoice discounting is a common finance tool or arrangement with a finance company or bank. It allows the financier to advance monies to a business against its debtors (customers) thus helping cash flow and providing liquidity to its clients. This form of finance has proven to be an extremely attractive form of finance however it is mostly overlooked by bankers, advisors and entrepreneurs themselves.
Most companies provide their product or service on credit terms to their clients and therefore have a massive asset in their debtors book that is not at all leveraged by most. Also you often find that many companies do not accept orders from large companies, due to the required payment terms. The purpose of this form of finance is to give you, the entrepreneur, access to immediate funds, without having to wait for the customer to pay the invoice. This is particularly beneficial to those of you who are in a growth period and committing more working capital to customer credit debtors. Effectively trading so well that they are starting to trade themselves into trouble.
The simple working of the product is as follows: The company lending you the money will agree that for all invoices raised you will have a certain percentage available of the value of the invoice at your disposal. This can also be done on a single invoice or project. You do not necessarily have to utilise the full available amount (credit limit) immediately but have the assurance that you can draw on the facility when needed. It can therefore act similar to an overdraft just with the added advantage that it is not directly influenced by fixed collateral as per bank requirements and the advantage that your credit limit increases as your business grows.
The process of getting a credit limit in place is actually very simple: The factor' (the lending company) is disclosed to all of your customers, with your customers paying the factor direct. The factor will collect all amounts due and offset this amount against your account. The balance of the invoice will be paid into your account, less the fee and interest.
To obtain such a facility you can log onto www.fogwell.co.za