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Put simply it's when you sell the right to collect a sales invoice to a discounter, who is so called because he buys the invoice at a discount to its face value, which is how he makes his profit. For the discounter's customer it's just a form of finance.
Won't people use Google anymore?
John, you are wrong! That must be a first.
You borrow money against the invoice. You still have to chase the customer for the money because you will lose the right to borrow re old invoices. The money is paid into an account belonging to the invoice discounter.
The advantages are that you can usually borrow a lot more than by overdraft or loans but the disadvantages for accountants are that you have to reconcile your sales ledger to the invoice discounters statements which can be a nightmare when the invoice discounter makes errors and customers pay into the wrong account.
Not sure what was wrong about my description. Suffice it to say that it's a form of finance linked to trade debtors. Wiill that do?
Better but vague
My description was a lot better.
What was wrong with your description was: "a discounter, who is so called because he buys the invoice at a discount to its face value". The discounter doesn't buy the invoice.
Buy was shorthand for "he acquires the right to receive the amount paid by the debtor". A reasonable shortcut, I suggest, in a sentence beginning "put simply".
Why not put it simply and accurately?
The invoice discounter lends money against the security of the debts of the invoice discounter.
I don't think putting something simply means you can get it wrong as well.
How about
A form of finance that works quite well in the good times, but disappears in the bad times, and is very expensive.
Can sometimes lead to personal bankruptcies of directors who didn't realise quite what they signed up to. (happened to a friend of mine)
I had a client
Who had a £100k overdraft and switched to invoice discounting and soon ran up a £300k loan! and this was about 15 years ago.
I think John's description sounds more like invoice factoring, where the credit control is handed over, whilst Peter's is invoice discounting, in which responsibility for credit control is retained, non? Or vice-versa - I can't always remember which is which.
Either way the banks seem pretty keen on invoice factoring/discounting these days, which means it must surely be a poorer deal than a traditional overdraft!