Simply put, invoice discounting or factoring is where a business borrows money from a lender who advances the business cash amounts based on their unpaid sales invoices. For this reason, invoice discounting is perfectly suited as a form of finance for certain types of businesses.
A recruitment business which offers temporary or contract staff typically need to pay their temp workers weekly, fortnightly or monthly however they must wait 30 days or more for their customers to pay.
Invoice discounting is common place in the recruitment industry because the cash advance on the customer invoice provides much needed to cashflow to pay temporary and contract staff in accordance with their payment terms.
Similar to recruitment business, in the construction industry workers need to be paid while invoices are typically paid on a drawdowns or staged payments. Invoice discounting can smooth the lumpy cashflow, providing construction businesses with working capital to keep suppliers and staff paid.
Manufacturing businesses need to produce their stock or goods for sale, which means production costs. Then once the product is ready, it needs to be shipped to customers upon which an invoice can be raised for the sale after which the business will need to wait for payment in accordance with credit terms offered.
Invoice discounting helps by releasing cash as soon as the customer invoice is raised, meaning a cash injection into the business to keep running and producing, ready for the next order.
In a printing business, similar to manufacturing, goods need to be provided to customers upon which an invoice can be raised. Using invoice discounting releases cash flow into the business as soon as the order is delivered.