Discounting

Discounting is a facility/service offered to well-established profitable businesses with an effective and professional sales ledger administration system (accounts receivable administration and collection). Discounting is a procedure through which a company is offered the same real cash flow benefits that factoring offers, but without the client’s obligation of losing control of the sales ledger.

The instrument is therefore more appropriate in trade finance operations, as a form of short-term credit. In particular it can be very helpful as part of a funding package for a new start business dealing with financially stronger customers. As the process is a transactional one, based very much on the strength of the end user, this facility is particularly useful for businesses whose own balance sheet is not strong enough to support the level of funding required.

There are two main charges in invoice discounting agreements:

 

  • Service Fee: This is a percentage charge on the discounted documents value
  • Cost of Money: This is an interest charge on the funds advanced by the discounter.