Refinancing an Invoice Discounting Facility: Key Benefits Explained
When your business depends on consistent cash flow, invoice discounting can be an invaluable tool. It helps you unlock funds tied up in unpaid invoices, keeping your working capital moving even while customers take their time to pay.
But what happens when your existing facility no longer fits your needs? Refinancing your invoice discounting arrangement allows you to reassess your current position, secure better rates, and gain greater flexibility. Whether you’re looking to cut costs, increase funding limits, or change how your facility is structured, refinancing could be a smart move.
What Is Invoice Discounting Refinancing?
Refinancing an invoice discounting facility means replacing your current arrangement with a new one, either with your existing lender or a new provider.
The process typically involves transferring your outstanding invoices to a new finance company, who will advance funds based on their value and your business performance.
The goal is to create a facility that better suits your current financial situation. You might negotiate lower discount rates, unlock a higher percentage of your invoice values, or move from a factoring facility, where the lender manages credit control, to a confidential invoice discounting setup where you retain full control of your customer relationships.
Refinancing doesn’t just refresh your funding terms; it can also streamline your processes and enhance your cash flow management.
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How Refinancing Works
The process of refinancing an invoice discounting facility can be straightforward, but it’s important to plan the steps to ensure a smooth transition.
1. Assess your needs
Start by identifying what you want to achieve from refinancing. Common reasons include lowering costs, accessing higher funding limits, or moving to a facility that gives you more autonomy. Understanding your goals will help you choose the right type of lender and facility.
2. Appraise your invoices and performance
The new lender will review your sales ledger, focusing on your customers’ reliability and payment history. They’ll assess your typical invoice values and turnover to calculate how much funding can be made available. In most cases, lenders advance between 80% and 90% of the invoice value, depending on the lender and situation.
3. Compare providers
Invoice finance is a competitive market, and different lenders offer varied rates, service levels, and funding limits.
4. Address issues with your existing facility
Before switching, it’s worth understanding what’s not working with your current agreement. High fees, restrictive limits, or lack of flexibility are common reasons businesses decide to refinance. Resolving these issues with a new lender can create a long-term benefit rather than just a short-term saving. You may be able to renegotiate these with your current lender directly.
5. Secure your new facility
Once you’ve chosen a new provider, you’ll agree new terms, such as the discount rate, service fee, and advance percentage. Security will typically include a debenture over your accounts receivable and, in some cases, a personal guarantee. After approval, your sales ledger transfers to the new lender, and the new facility pays off your old one.
6. Transition smoothly
The transition involves notifying customers where payments should be directed, though with confidential invoice discounting, this process remains discreet. The aim is minimal disruption, ensuring your cash flow continues uninterrupted throughout the switch.
Why Refinance an Invoice Discounting Facility?
Refinancing can deliver multiple advantages for established businesses that rely on invoice finance. Some of these are as follows:
Reduce costs
Lenders usually base their discount fees on a margin above the Bank of England base rate. Over time, as your business grows or your credit profile improves, you may qualify for a better rate. Even a small percentage reduction can create substantial annual savings when taking into account larger sums of money.
Access more funding
A new facility may offer a higher advance percentage or an increased overall limit, giving your business more immediate working capital. This can help you fund expansion, take on new contracts, or manage seasonal demand more effectively.
Improve flexibility
Your business needs may have evolved since you first arranged your invoice finance. Refinancing can let you move to a facility that offers more freedom, such as selective invoice discounting, where you choose which invoices to fund, rather than a whole-turnover arrangement.
Change facility structure
Some businesses start with factoring, where the lender manages credit control. Refinancing gives you the option to move to confidential invoice discounting, allowing you to keep full control of your customer relationships while still benefiting from immediate access to cash.
Alternatives to Refinancing
If you’re considering other ways to improve cash flow, there are alternative funding options worth exploring alongside invoice discounting:
- Business loans or revolving credit facilities: These can be suitable for businesses seeking fixed-term borrowing or flexible drawdown options.
- Overdrafts: Useful for short-term cash flow support, often with simple setup and minimal ongoing management.
- Merchant cash advances: Often suitable for businesses with regular card sales, where repayments are tied to revenue rather than fixed amounts.
When Refinancing Can Make Sense
Refinancing an invoice discounting facility can be particularly advantageous if:
- Your business has grown, and your current funding limit is no longer sufficient
- You want to lower fees and improve your cash flow margin
- You’re unhappy with your current provider’s service
- You wish to change from factoring to confidential invoice discounting
- You’re seeking more flexibility or better technology integration (such as linking to Xero or Sage, or Quickbooks)
Conclusion
Refinancing an existing invoice discounting facility can be an effective way to enhance your cash flow strategy.
Whether you’re aiming to reduce costs, unlock more capital, or gain greater control over your finance, switching to a better-suited facility can strengthen your business for the long term.
If you would like to explore this further, get in touch with Kerr & Watson today.
