Invoice discounting is the process of selling a company’s receivables (or its invoices due from customers) to a financing firm that pays them immediately in return for a fee. A company that is facing problems with cash flow may regard such a service as highly attractive; instead of having to wait up to 90 days for customers to pay their invoices, they can gain access to the money immediately to cover their operating costs.
There are two invoice discounting costs. The first is a service fee that is charged for creating this type of financing facility. This is often calculated as a percentage of the company’s overall turnover. The second is the cost of the discount fee, which represents the cost of borrowing against outstanding invoices. For each invoice that a company receives an advance for they are charged a finance fee (which is like the interest rate on a loan) which usually amounts to a few percentage points of the invoice amount.
