Cash Management

bambilicious

Hi All,

I am just trying to learn about the benefits of a company offering discounted invoicing etc and what the benefits are to the business - can anyone shed some light on this as I don't really know all the answer. its a little quiz that I have been set for my unit.

blobbyh

Do you know what invoice discounting is? If not, here's a quick explanation form last year:

http://forums.aat.org.uk/showthread.php?t=23039&highlight=invoice+discounting

Benefits to the invoice discounting borrower:
1. They get a percentage of their invoice value almost immediately without having to wait for their debtors to pay up.
2. They retain control of their own ledgers.
3. Their debtors are blissfully unaware of the arrangement.

This is unlike factoring where the lender assumes total control of the ledgers and the debtors are informed all monies should be paid directly to them rather than to the borrowing company. There is some loss of the personal touch. Additionally, if the lenders are overly persistent or aggressive in their collections - as they often are - this can potentially result in ill will and lost future trade for the factored company.

Benefits to the invoice discounting lender:
1) They keep an agreed percentage of each invoice once paid as their commission on providing the service and performing administrative duties.
2) They charge interest on the value of the total outstanding debt each month.

Kept in check, invoice discounting and factoring can initially benefit cash weak companies in the short term but the longer the arrangement goes on, the more reliant they can become on it, it becomes incrementally more expensive the more they borrow and thus grows increasingly difficult to claw their way back out of it and exit the deal.

blobbyh

No problem, don't mention it.

reader

Lol