Bank lending is increasingly difficult to come by and, as a result, many small business owners are looking for alternatives.
Invoice discounting is an increasingly popular method of alternative finance – but what exactly is it, and can it really win out against bank loans?
What is invoice discounting?
Invoice discounting is a form of invoice finance. It involves borrowing against the value of your unpaid invoices, the face value of which will be paid to you by an invoice finance company. You then chase the invoices in the normal way, and you settle up with the invoice finance company when the invoice is paid.
What are its advantages and disadvantages?
Invoice discounting is a highly flexible means by which you can finance your business. As your borrowing is based on the value of your sales, invoice discounting expands with your business. This also means it is very difficult to get into more debt than you can manage.
Invoice discounting is also cheap, and can have a huge impact on your cashflow. You can often get as much as 95 per cent of the face value of your invoice, and often within 24 hours, meaning that invoice discounting is a highly cost-effective method of eliminating the problem of late payment.
Will I be able to get a business loan?
The banks have been famously reticent to lend since the onset of the financial crisis, and bank lending to businesses has fallen consistently over the last few years. Just as importantly, there is a sense amongst many business owners that it is simply not worth applying, as they presume that they will be turned down.
For their part, the banks maintain that they are willing to lend to businesses, and are actively encouraging applications. The banks may still be a potential route by which you can secure funding, but it is important to understand that this is likely to be an option only if you have an exemplary credit history, and if you can prove that you have a viable business model. You can read more about building a business plan and applying for bank finance elsewhere in our Knowledge Centre.
What are business loans’ advantages and disadvantages?
There are some major advantages associated with bank loans. The first of these is that, if you have a fixed rate loan, you can be sure that your repayments will remain the same every month, helping you to plan. You will also have a set final repayment date, meaning that you will know when you will no longer have to service the debt.
There are, however, just as many disadvantages. Bank loans are highly inflexible; you borrow a lump sum, but it might turn out that you need either not all of it or more than you first thought. This can be a difficult problem to solve. Additionally, bank lending can be very expensive – and, with rates set to rise, it looks set to become even more costly in the medium term.
In conclusion, then, you should ensure that you build a finance strategy that makes use of a mix of credit facilities that work for you. While invoice discounting may not be able to fulfil all of your finance requirements, when used as part of a sensible finance strategy it can transform your cashflow situation, reduce the cost of borrowing, and reduce your reliance on the banks.