Invoice Discounting: Is It Right for You? | National Pallets

Small businesses that choose pallet delivery are obviously smart about expenses. Every pound counts for an SME, and why spend money that you don't have to, especially when late payments to small businesses continue to be a source of stress throughout the UK?

While there have been many calls for the government to step in and rescue the drowning with some sort of regulation, so far SMEs have had little to fall back on – at least, not until recently, as more businesses are now turning to different methods for trading on their invoices in order to ease cash flow problems.

Here we discuss a type of financing called invoice discounting.

How it works

With discounting, you present your unpaid invoices to a financier, who in turn gives you an immediate loan on a percentage of each – say, 85 percent or so. When your customers pay, the money will go back to your lender, reducing your debt. This quick financing can help you cover short-term costs such as payroll or provide capital that allows you to grow or take on a new client. You can usually pick and choose which invoices you want to borrow against, so the system is fairly flexible.

Calculating whether it's right for you

The biggest advantage is that this really is a source of fast money. There is risk to the lender, of course, in that a debt might not get paid for any number of reasons – so most lenders will perform due diligence to see whether your non-paying customer is credit-worthy. But after that, you'll see money within hours or days, instead of months. This has helped many small businesses solve liquidity problems.

Borrowers, though, will lose profit on their services or products. The process is called invoice discounting because in exchange for early payment, you are ultimately agreeing to get paid less than you were originally owed. Depending on your margins, this could be a totally acceptable trade-off. The other aspect to consider is that you, and not your lender, will still be responsible for chasing payments, so you won't be rid of that task.

Note that you are not guaranteed financing: if it looks as though your company's solvency is dependent on your customer's, the situation might not look like a good risk to a lender. Alternatively, if your debtor happens to be a large company that is just late paying its invoices (and data shows that the larger the company, the more intransigent they tend to be), but the money is assuredly coming, then you'll probably be deemed a good prospect.

The dynamic discounting marketplace is hopping in the UK, and terms are becoming more favourable to invoice suppliers, so it is worth your while to investigate this type of finance. With pallet delivery, you've already made one smart choice.