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19 Jun
  • Editorial Team
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Every business requires working capital for operations as the cash inflows do not always match the outflows. As you provide credit facilities to your customers in order to boost sales, a significant portion of your funds may get stuck in accounts receivables or pending invoices. In such circumstances, you have the option to leverage your sales ledger with invoice discounting. Under it, the invoice is sold for a percentage of its value.Improve your cash flows with invoice discounting and get the funds released without taking on any additional debt. Read on to learn more
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Who should opt for invoice discounting?
Invoice discounting can be a good option for established businesses with high turn-over. For start-ups with uncertain sales and low reliability on turnover, this facility may be a good option only if you are trying for a single high-value invoice discount, as lenders may not be interested in cases where the sales are uncertain and credit procedures are not established. You should opt for invoice discounting if:
  • You have an in-house invoice management.
  • Your payment terms are established with at least 30 days grace period.
  • You have robust credit procedures.
  • You are low on bad debts and have good history of invoice payment collections.
  • You have a high turnover that meets the lender requirement.

Invoice discounting is thus, a good option for businesses with in-house credit management practices as the lenders give you the discounted cash immediately and the invoice collections are received by them. The customers do not come to know about the presence of an alternative financer. The lender is not in direct contact with the customers unlike factoring, so this is a discrete invoice discounting facility.

Also Read: What is Bill or Invoice Discounting?

Benefits of invoice discounting
Invoice discounting is a good way of leveraging your sales invoices to receive immediate flow of cash that would otherwise be stuck in receivables. Other reasons to use invoice discounting include:
  • Quick finance solution by improving your cash flow cycle, so working capital requirements are lowered.
  • Use stuck up funds to get working capital and avoid use of debt to get working capital. No need of any additional security or collateral and get funds immediately.
  • No need to chase debtors, especially when there are a large number of low-value invoices. Even in case of high value invoices, invoice discounting helps in providing an influx of much needed cash that would otherwise be stuck.
  • Better than factoring as you remain in control of your sales ledger and customers do not come to know of this arrangement.
  • Maintain better customer relationship since the lenders do not contact the customers directly.

How does invoice discounting work
To avail invoice discounting, select a lending partner whose turnover criteria can be met and who can meet your terms and conditions regarding percentage of invoices discounted, and the time in which funds are released to you.
On receipt of sales invoice, the lender pays up the decided percentage of the invoice amount immediately as decided in the terms.
At the end of the payment term of the invoice, the cash collected from the invoice is paid to the lender from the institution’s special account.

Also Read :A Complete Guide To Bill/Invoice Discounting

Risks involved in invoice discounting
Invoice discounting is offered only for commercial invoices and is available only for established businesses. The institution does not receive full amount of invoice, so there is a chance of a loss. The business needs to have a robust credit collection process to avail the facility as invoice discounting is riskier for lenders than factoring. To cover up for the additional risk that comes from having no control over customer payments, the lenders are usually picky and look at past turnovers and credit records.

Also Read: Improve Cash Flows With Bill Or Invoice Discounting

Conclusion
Large businesses, with a good credit control over accounts receivables, are generally good candidates for invoice discounting. However, if your business is unable to meet these stringent criteria, it may be prudent to look for other closely related options like factoring. So, choose your working capital wisely and get the benefit without taking on any additional debt.
 

Did You Know

Disbursement

The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.

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