10.7 Invoice discounting

Question 1

What is invoice discounting?

Answer 1

A short term borrowing arrangement whereby a company can borrow cash from financial institutions against invoices raised.

Question 2

What are the advantages of invoice discounting?

Answer 2

• quicker than loans or overdrafts (can be done within 24 hours)
• provides significantly more cash than a traditional bank
• accelerates cash flow since 80% of invoices can be converted to cash
• no fixed assets required as collateral (only invoices)
• makes sales more liquid
• borrowers maintain control over receivables
• confidentiality can be maintained over the arrangement
• company can obtain cash while still allowing the usual credit period to customers

Question 3

What are the disadvantages of invoice discounting?

Answer 3

• additional fees from the discount provider decrease company profit margins
• reliance on invoice accounting may not be taken positively by shareholders - can give the impression of finance struggles
• available only on commercial invoices (not from general public invoices)
• may cause management to lose focus on strengthening its credit norms