{"id":182642,"date":"2023-08-17T01:20:49","date_gmt":"2023-08-17T00:20:49","guid":{"rendered":"https:\/\/legalvision.co.uk\/?p=182642"},"modified":"2025-07-02T00:38:01","modified_gmt":"2025-07-01T23:38:01","slug":"invoice-discounting-startup","status":"publish","type":"post","link":"https:\/\/legalvision.co.uk\/startups\/invoice-discounting-startup\/","title":{"rendered":"What is Invoice Discounting?"},"content":{"rendered":"\n

One of the issues that startups face is securing financing. We tend to think of financing as long-term financing. That is, raising equity or long-term debt. However, short-term financing is another essential consideration. This is especially true for cash-strapped startups. Invoice discounting is a form of short-term financing that can help with cash flow challenges. Under an invoice discounting agreement, a special financial business called a factor loans you money against the value of your unpaid invoices. Your startup remains responsible for collecting the invoice and repaying the factor. This article will examine what invoice discounting is in more detail. <\/p>\n\n\n\n

What is Invoice Discounting?<\/h2>\n\n\n\n

Under an invoice discounting agreement, your trade receivables, that is, your outstanding invoices, serve as collateral for a loan given to you by a factor. <\/p>\n\n\n\n

A factor is a special finance company that specialises in providing short-term financing arrangements based on the value of a business\u2019s trade receivables. In short, the factor will typically offer you a loan amount between 70-85% of the value of your trade receivables. The exact amount depends on the creditworthiness of your customers. <\/p>\n\n\n\n

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While the loan remains outstanding, interest accrues on the balance daily. Under invoice discounting, you remain responsible for the collection of your invoices.<\/p>\n<\/div>\n\n\n\n

In an undisclosed discounting agreement, the customer is unaware of arrangements between you and the factor. But under a disclosed discounting agreement, the customer is aware. In this case, you will typically include the customer in the legal documents used to create the invoice discounting agreement. <\/p>\n\n\n\n

Invoice discounting can take the form of recourse or non-recourse discounting. Recourse factoring means you retain the risk that one or more of your customers will not pay their invoices. If this happens, you must treat the non-payment as a bad debt, which you deduct as an expense in your accounts. <\/p>\n\n\n\n

Under a non-recourse discounting agreement, the factor assumes non-payment liability on your behalf. Usually, the factor will offer you a lower percentage of the face value of your trade receivables to compensate them for the increased risk that your customer will not pay.<\/p>\n\n\n

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How Does Invoice Discounting Work?<\/h2>\n\n\n\n

Invoice discounting<\/a> operates by a unique legal mechanism known as an assignment. Trade receivables are a form of current asset capable of being bought, sold, or assigned. When you assign something to another person, you essentially transfer the benefit you receive from another party (your customer) to another party (the factor). <\/p>\n\n\n\n

A typical invoice discounting agreement looks like this:<\/p>\n\n\n\n

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  1. Your startup sells its goods or services to a customer as it usually would.<\/li>\n\n\n\n
  2. Your startup invoices the customer and simultaneously notifies the factor that it has raised the invoice. <\/li>\n\n\n\n
  3. You will negotiate with the factor the value of the discounting agreement. This will usually be the value of the invoice minus a discount to reflect the convenience you receive by obtaining cash upfront. You will also agree on a rate of interest.<\/li>\n\n\n\n
  4. The factor advances this amount upfront, typically after undertaking an audit of your collections process. <\/li>\n\n\n\n
  5. Interest accrues on the outstanding balance. <\/li>\n\n\n\n
  6. Your startup remains responsible for collecting the invoice amount from your customer. When your customer pays the invoice, you pay the total amount to the factor. <\/li>\n\n\n\n
  7. The factor deducts from this amount the funds advanced, any outstanding interest, and any additional fees. It then releases the remaining balance to your startup. <\/li>\n<\/ol>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\n
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