Made easy to understand
It is just true to say that many businesses are not even aware what Invoice Discounting is, never mind how this financial service can help any importing, manufacturing business dealing with the distribution of goods and services.
In this presentation we will just focus on what Invoice Discounting is in the concept of Modern Working Capital Techniques.
To help us we need to understand a few basic terms that are in the glossary below.
Glossary
Invoice: The document that covers the delivery of goods and services to creditworthy buyers as they move from Supplier to Buyer.
The Financier: This could be a Division of a bank or specialist Finance House that provides this kind of finance.
Non-recourse Discounting: Here the Financier takes all the risk in the financing transaction.
With Recourse Discounting:
Here the Financier has the ability, as expressed in the Invoice Discounting Agreement, to seek payment from the Supplier should the Buyer fail to pay the invoice due on the stated date.
Retention Account: This is the amount retained by the Financier as he finances the transaction as a part safety net pending the Buyer paying the amount due. The Retention Amount is repaid to the Supplier, less the Discounting Fee and Interest Due, as the Buyer settles the transaction.
Elements of Cost
The Discounting Fee: The Financier will make a charge in for arranging the Working Capital that is being provided.
The Interest Component: This amount is calculated on the number days that the invoice will remain unpaid at prevailing Interest Rates for transactions of this nature.
These cost elements are not excessive, and are negligible when one thinks of all the benefits that arise from this way of creating Working Capital.
Let’s look at an example of what Invoice Discounting does
- Consider that you are a Supplier of goods to a Buyer.
- You have delivered the goods to him under cover of an invoice of R1 000 due to be paid in 60 days time (the tenets of the transaction).
- However, you are short of cash to pay ways, buy more raw materials and stock to enable you to continue your business and to keep the roof over your head, feed, clothe and educate your family and you prefer to be paid far quicker than to wait 60 long days!
- So you look for a Financier to Discount your invoice. You find one!
- The Financier buys the invoice from you conditionally on the following Terms and Conditions:
- The Financier will pay you 75% of the invoice value up-front but will keep back 25% in his Retention Account as a measure of security pending the Buyer paying the Financier. Thereafter the Financier will return this 25% less the Discounting Fee and Interest charges.
To recap in other words
You offer the R1 000 invoice to the Financier.
He buys it and credits your bank account with R750 keeping back R250 Retention.
The Financier then waits for the Buyer to pay him the full R1 000.
On receipt of the R1 000 the Buyer then pays you, the Supplier back the R250 held in Retention less Invoice Discounting Fee and Interest due on the number of days the invoice has been outstanding to the Financier. This closes the transaction.
That is what Invoice Discounting is in a nutshell.
Modern Working Capital Techniques 