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• 04 May

  Discounting Invoices

  

  Sometimes I despair at the amount of jargon that we use within our sector. I had a recent conversation with someone new the receivables financing sector, which demonstrated perfectly how confusing it can all be to those outside the industry.

  Discounting Invoices

  We were discussing discounting invoices, which I took to mean the receivables financing service (a.k.a. invoice finance) whereby a supplier receives a prepayment against their invoices (with the balance, less the fee, passed to them when the debtor pays). I was talking about prepayment levels and how different sectors have different levels of prepayment percentage. I mentioned that in the construction sector it is typically 70% due to the contractual nature of the sales.

  Discounting Your Invoices

  The other party was shocked and couldn't understand why anyone would accept 70% of their invoice value. They had a completely different understanding, they thought I meant that the supplier would only receive 70% in total, rather than 70% in advance and the remaining 30% (less the fee) when the customer pays, which is the case.

  Receivables Financing Jargon

  The problem is the jargon that we use. To us discounting invoices can mean the process of providing invoice finance, or it can mean giving someone a discount on the value of a purchase. To make matters worse, we also talk about one component of receivables finance pricing which we call the "discount charge" or "discount fee".

  To insiders the terminology seems straightforward, but it is open to huge misunderstandings. This particular misunderstanding is greatly concerning as I have heard it before. Those not familiar with how these products work hear about the prepayment percentage and wrongly assume that is all they are going to receive. Had it been an online article that the other party was reading, they may just as easily have decided not to pursue this option altogether, after all - who wants to lose 30% of their invoice values!

  By Glenn Blackman