Why invoice discounting is great way to improve cash flow for SMEs

Understanding Invoice/Bill discounting

Ever caught yourself in a situation where your payment from one order is delayed but the expenses for other orders keep coming? Any trader worth his salt has faced this because the market works more on credit than cash. But just because it is normal doesn't mean it isn't a problem. However, this problem could be solved with a simple solution of invoice discounting.

The easiest way to understand Bill/Invoice discounting is as a type of loan. While the usual loans require some kind of asset as a guarantee, invoice discounting works on the basis of invoices. In simple words, you say "Here is the bill that says I will receive payment in few days. In the meantime, I require some capital", and the intermediary takes care of the rest (at a certain interest, of course!).

Why choose invoice discounting?

1) Quick Access

The procedure works in two steps: you show the bills and you get the money. For people who need capital in a matter of hours, this system works great. The financial institutions/ NBFCs involved in this arrangement have funds readily available to be assigned, without the hefty procedure of normal banks.

2) No collateral

Like we mentioned, there are no assets you need to submit as collateral. Your invoices are your word, and they are good enough to warrant a loan. It saves you from putting your assets on the line of risk if the deal goes bad, and protects you from bankruptcy.

3) Fast processing

The reason why bank loans are terribly inefficient in this scenario is the time they take. Your application must wait in a long queue, and then there is the tremendous paperwork involved. In bill discounting, a few proofs and the necessary invoices are all you need to get the money in few hours.

4) Improved efficiency

Invoice discounting avails you funds with minimal waiting time and paperwork, while maintaining the confidentiality of the arrangement. In other words, you always have the capital readily available without wasting any time and efforts, and without putting any assets on the line of risk. In the world of finance, this is how you define “efficiency”.

How can bill/invoice discounting help your business?

1) Healthy cash flow

A lot of invoices with pending payments effectively translate into a lot of paper but no actual money. Invoice discounting changes that by converting most of your invoices into cash. In that way, you do not need to accumulate extra funds as an insurance against bad debts, and instead invest them into your business.

2) Increased business growth

To run a business, you need capital. Easy availability of cash ensures that your operations are never disrupted and you can even expand your business without the worry of lacking funds. Furthermore, a longer time-period to make payments might encourage the customers to trust you more.

3) Hassle free invoice management

In a similar fashion to shooting two birds with one stone, invoice discounting achieves two goals. Not only it ensures quick loans for you, but also makes sure that your invoices are updated, managed and organized. Proper invoice management will help you in the long run, especially while paying taxes.

4) Greater flexibility

Invoice discounting enables a steady flow of capital, as and when needed. In some cases, there is also protection against bad debt. These factors collectively provide a greater flexibility to your business, as you no longer need to be dependent upon the customers for the necessary capital.

Eligibility and Documentation

In order to be eligible for invoice discounting, few key criteria must be satisfied:

• Both the contract and the payment must have a written record, endorsed by both the parties (the company and the customer).

• A purchase order, in response to the sales order, must be raised by the concerned customer.

• The goods/services pertaining to the order must be successfully delivered to the customer.

• An invoice is raised and approved by the customer, but the payment is pending.

• There must be a fixed date for the outstanding payment as promised by the customer.

If you are eligible for invoice discounting, you need to follow the following steps in order to avail the credit:

• Approaching the intermediary financial institution/ NBFC, along with the invoices.

• The financial institution performs some background checks to ensure the credibility of the invoices.

• Funds are issued by the institution, along with the necessary documentation and the specified margins for the said institution.

• The company receives the funds it had applied for.

• Upon the due date, the funds and the margin are returned to the institution.

Conclusion

Invoice or bill discounting is one of the smart practices that evolved in recent times to allow business owners with more room to expand their wings. In stark contrast to the inefficient loaning system of banks, invoice discounting provides you the capital immediately when you need them, with hardly any questions asked. All of this possible, simply by the invoices you raise anyway after every order. Just the kind of smart practice a smart businessman needs.