Many companies have negative perceptions of invoice discounting, perceiving it to be expensive, administratively cumbersome and requiring disclosure to their clients. While these arguments may have been levied against the industry in the past, it has certainly come a long way in recent years. Barry McCall reports.
It is now largely electronically driven, with little paperwork in the system; debtors remain unaware of the facility operating as they continue to have their normal working relationship with their customer.
"In the context of cost, there are two elements," says Sean O'Hanrahan, sales director with Ulster Bank Commercial Services. "The discounting charge, which is broadly similar to or often lower than the business overdraft rate, and the administration fee which varies depending on the workload involved. This figure replaces those hidden charges which are associated with a bank overdraft, specifically excess interest, referral item charges, administration time and the charge for cheques lodged." As regards being administratively cumbersome, a number of invoice finance companies have invested heavily in technology and, in many cases, the interaction between the client and the invoice discounting company is now by means of computer link with limited paper involved.
Other options in this area also include a supplier payment facility which will pay your suppliers on your behalf, putting essential cash into your business to assist the company's growth. Debtors are obviously one element of the working-capital cycle, but the other two, which are no less important, are stocks and creditors. Quite often these two have to be funded, particularly in manufacturing, before invoices can be generated to raise finance through invoice discounting. To address this scenario, some invoice finance companies have developed a supplier payment product which essentially provides stock finance by means of direct payment to suppliers.
"Using a supplier payment facility you can pay your suppliers early and avail of early settlement discounts. This has proved so successful for some of customers that significant savings have been made by negotiating discounts, which can make a supplier payment line self financing. In fact some customers have made significant profits using the facility over and above any costs," says O'Hanrahan.
Alternatively, clients can forgo discounts and take the credit offered by their suppliers out to 90 days and then using a supplier payment facility pay their suppliers to terms and take additional credit via the product. "This can rearrange the working capital cycle to better suit the circumstances of the business," says O'Hanrahan. "A supplier payment facility is tailored to each company's own working-capital cycle and is particularly useful to companies involved in sectors such as manufacturing, retail, importing and distribution. Invoice finance and a supplier payment facility put vital cash into a client's business and puts them in total control of their working capital."
