{"id":182829,"date":"2023-09-06T01:42:42","date_gmt":"2023-09-06T00:42:42","guid":{"rendered":"https:\/\/legalvision.co.uk\/?p=182829"},"modified":"2025-07-02T00:37:53","modified_gmt":"2025-07-01T23:37:53","slug":"legal-considerations-invoice-discounting-agreements","status":"publish","type":"post","link":"https:\/\/legalvision.co.uk\/startups\/legal-considerations-invoice-discounting-agreements\/","title":{"rendered":"Legal Considerations When Entering an Invoice Discounting Agreement"},"content":{"rendered":"\n

An invoice discount agreement can be an effective way for your startup to manage its cash flow<\/a>. However, the legal mechanics behind an invoice discount agreement can be complex. Accordingly, you may wish to familiarise yourself with how invoice discount agreements operate from a legal perspective. This article will evaluate important legal considerations to bear in mind before entering into an invoice discount agreement. As you will see, your startup may wish to obtain legal advice because invoice discounting is a complex arrangement.<\/p>\n\n\n\n

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

Invoice discounting is a financing arrangement<\/a> where your outstanding invoices serve as collateral for a loan provided by a specialised finance company called a factor. The factor typically offers a loan amount between 70-85% of the invoice value, depending on the creditworthiness of your customers. Interest accrues on the outstanding balance daily. <\/p>\n\n\n\n

With invoice discounting, you are responsible for collecting the invoices. <\/p>\n\n\n\n

There are two types of invoice discounting agreements: undisclosed and disclosed. In undisclosed discounting, the customer is unaware of the arrangement, while in disclosed discounting, the customer is aware and may be included in the legal documents. <\/p>\n\n\n\n

Invoice discounting can be recourse or non-recourse. Recourse factoring means you bear the risk of customer non-payment, treating it as a bad debt. Non-recourse factoring transfers the liability of non-payment to the factor. This usually results in a lower percentage of the invoice value offered to compensate for the increased risk.<\/p>\n\n\n\n

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

Invoice discounting functions through a legal process called assignment. Assignment describes an agreement where you transfer the benefit of an asset to a third party. Specifically, you assign trade receivables<\/a> to the factor. This gives them the legal right to collect the payments when your customers pay the invoice. It creates a corresponding legal obligation on you to pay to the factor the invoice proceeds. <\/p>\n\n\n\n

In a standard invoice discounting agreement:<\/p>\n\n\n\n

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  1. Your startup conducts its usual sales with a customer.<\/li>\n\n\n\n
  2. Your startup sends an invoice to the customer and simultaneously informs the factor about the raised invoice.<\/li>\n\n\n\n
  3. You negotiate with the factor regarding the value of the discounting agreement. This value typically represents the invoice amount minus a discount, which accounts for the convenience of receiving immediate cash. Additionally, an interest rate is agreed upon.<\/li>\n\n\n\n
  4. After conducting an audit of your collections process, the factor provides an upfront advance, based on the agreed amount.<\/li>\n\n\n\n
  5. Interest starts accumulating on the remaining balance.<\/li>\n\n\n\n
  6. Your startup retains the responsibility of collecting the invoice payment from the customer. Once the customer pays the invoice, you remit the full amount to the factor.<\/li>\n\n\n\n
  7. The factor deducts the advanced funds, any outstanding interest, and applicable fees from the payment. The remaining balance is then released 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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