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Leveraging capital through invoice discounting

Raising future revenue by selling on your invoices is an ever more popular route to growth, but it also has its dangers, warns Anthony Harrington

The practice of invoice discount­ing used to be targeted solely at small companies who were not of a sufficient scale to employ the staff required to cash manage the company’s debtors ledger. Today, leveraging capital by selling on your invoices to a third party who can then give you that cash immediately is increasingly seen by companies of all sizes as a very powerful tool for enhancing the flow of working capital to the business. That said, it remains a mostly confidential practice and one that many FDs would not wish their clients to know they used, given the sense of outsourced debt collection around this type of funding.

In his position as chair of the Asset Based Financing Association, Steve Box says that there has been around £64bn in confidential invoice financing conducted in the UK in 2010 among small- and medium-sized businesses. In his day job as managing director for HSBC’s UK invoice finance operation, he reports that in the last year, the bank has released three tranches of £100m each to different UK plcs in this way. “My overall advances to the market are up by £300m year-on-year. We are seeing a lot of demand right across the market and an increasing appetite from the top end plcs,” he says.

A good part of this increase is attributed to companies trading internationally and looking to their invoice discount provider to manage overseas collection for them. HSBC, for example, collects in 15 languages from 104 countries.

According to Martin Rotheram, head of invoice financing at Clydesdale and Yorkshire Banks – part of the National Australia Bank Group – demand for invoice financing is being driven now by the fact that cash is available instantly and that arrangements carry a lot of funding flexibility. Providers release an agreed percentage, say around 85 percent, of the value of an invoice to the business as soon as it is raised. If sales grow, the working capital available to the company grows at the same pace without the need for further bank negotiations. Routes to funding such as the government’s new finance scheme (see page 38) and begging the bank for a loan simply take more time and are more expensive.

However, Peter Barry, finance director at Meiko UK, warns that while fast access to cash and the ability to move with the business’s growth plans are strong upsides, there are some negatives to invoice discounting that companies need to bear in mind. Probably chief among these, he says, is the fact that if sales suddenly fall off a cliff – as they did for many companies during the crash and would if the threat of a double-dip recession became reality – companies could find their chief source of working capital dries up.

Finance directors also need to be aware of the fact that banks expect companies to be on top of collecting their debts. Advances on debt outstanding after 120 days will be clawed back – unless they want to insure against customers defaulting on their terms, which pushes up the cost of invoice discounting and may negate the reason for undertaking it.

Invoice discounting – the FD’s view

We asked FDs who have made use of invoice discounting to give us their thoughts:


  • Invoice discounting is a way of financing an expanding business. As turnover goes up, so does immediate cashflow
  • It can help businesses avoid overdrafts and personal guarantees, though discounters may sometimes ask for these
  • Companies using invoice discounting can have credit insurance built in, or outsource the entire credit control function, though this can be costly


  • SME managers often do not understand the risks – for example, why a downturn in turnover can create a cashflow crisis as funds dry upimmediately
  • The percentage charge on each invoice is often less preferential than the cost of a bank loan, which could be a risk
  • The risk of fraud exists as unscrupulous clients may invent invoices to get short-term cashflow, then go to the wall
  • There is potential for clawback of available funds by a discounting house when invoices are overdue
  • Your client and supplier relationships risk damage if the provider of invoice discounting uses particularly aggressive debt collection methods
  • Invoice discounting can encourage over-trading and lead to a potential downgrade of your creditworthiness if your suppliers know you use invoice discounting – it is still a maligned form of funding even if many companies find it useful
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