Invoice Discounting — Definition, How it Works & Its Benefits

The growth of start-up companies and small businesses has been fueled by profound changes in society’s economic structure. These organizations need capital to sustain themselves — and their employees’ livelihoods__ — but raising money can be difficult for new businesses with little or no track record. Small enterprises can get financing from many sources, including short-term business loans and investors. However, there are other finance options available — like invoice factoring and merchant cash advances

Invoice Finance

Invoice Finance has come up as a strong option to secure short-term business financing. It is an alternative form of capital that allows companies to use invoices they have already created as collateral when applying for loans, thus avoiding the need to wait until clients actually pay their bills before cashing in on them

Why Invoice Finance is needed?

Most new businesses sell their goods to wholesalers in large quantities on credit; the payment for these goods is not made immediately and buyers are given a period of up to 30 days within which they must make that payment. This can put some suppliers in a difficult position and delays the payment of their invoices. This causes cash flow problems for small businesses because suppliers often require payment within 30 to 45 days.

Invoice Bill Discounting

Invoice discounting is a form of factoring, which means that we buy your invoices at a discounted rate. You’re able to make more money off the sale of your goods and services than you would by waiting to receive payment from your customers.

Here is how invoice discounting works.?

• Large-scale companies often send out invoices, or bills, to their customers when they have sold goods on consignment.
• The business sells its goods on credit.
• One party seeks an extension of the credit period and another wishes to immediately begin receiving payments.
• The supplier would rather lock in the price for future deliveries than risk fluctuating prices later.
• Suppliers can sell their bills of lading to a company that advances money against the documents.
• In this scenario, the company gives you a small amount of cash up-front for your bill, but expects to be paid back most or all of that money by taking its cut from future payments.
• After discounting bills, companies often receive more than the face value of those bills. The difference between what is paid to suppliers and what they charge customers (discount fees) goes to their profits.
• With these cash reserves, the buyer is free to use that money as needed — thus generating extra income.
• On the due date of the bill, whether it is owed by a supplier or borrowed from a lender, that entity will collect payment from buyer.

Benefits of Invoice Discounting

• Discounting invoices is a private process. Customer information isn’t shared during this transaction.
• Small businesses that have trouble securing loans can use factoring as an alternative way to obtain working capital.
• Unpaid invoices are collected by the agency.
• An immediate solution to the problem of slow-paying customers.
• A credit line is less restrictive than a loan or an overdraft.
• The supplier is responsible for collecting payments from customers.
• Discounting without Recourse can be used in case of invoice financing bad credit options.

Invoice Discounting is based on several factors:

• What you need to finance your business
• How much you earn each month on average from your business
• Your business visibility
• Client retention in your business
• Invoices outstanding amount

Invoice Discounting FAQs:

1. Who can avail Invoice Discounting?

Businesses that provide services to other businesses, manufacturers or distributors may find invoice discounting of use.

2. What is the difference between Factoring and Invoice Finance?

Invoice Finance agreements are private. The seller retains information about their customers, and the customer has no knowledge of any discounting agreement between them and the invoice finance company. In the case of Factoring, it is the lender or factor who contacts the buyer and receives payment. The bank does not maintain confidentiality when it comes to customer information.

3. Is any security required if I take Invoice Finance with you?

Invoice Discounting does not require you to make any property security available for collateral. Your debtors or the Accounts receivable ledger of your business will serve as a suitable asset against which funds can be lent.

4. How will I know if Invoice Discounting is good for me?

Invoice Discounting is most beneficial for companies with:

• Low bad debts
• Customers who make timely payments
• Customers have a minimum 30-day credit period
• You meet the minimum turnover criteria

What are the benefits of Invoice Discounting?

You can access the funds immediately. The process is quick and easy, and there’s no need to pledge assets as security.

6. How much loan can I avail of?

The amount of loan you are granted depends on your financial needs and credit score. We will lend up to 90% of the total cost of an asset if conditions allow us.