Dec 10
12
Business Finance – Invoice Discounting Primer & Benefits
No matter how large or small, every company has to face the problem of arranging for business finance to ease cash flow. Increasing sales always means more pending receipts, and more working capital that gets tied up for months before payments come through. One easy way to open up this bottleneck is invoice discounting.
The thing about additional working capital is that it is has to be plowed in at the exact moment when it is required. Traditional loans take much more time for approval, and are of no use in this case anyway since the financing needs are not for purchase of capital equipment or other tangible goods. The point here is that it needs an unconventional solution that will provide instant cash to replace the amounts that are tied up in outstanding debts.
This is exactly what invoice discounting does – the lender provides the company with access to a balance that is equal to a percentage of the company’s sales ledger. This means that the company is borrowing (or taking an advance) against its unpaid sales invoices. The best part is that the company has access to the funds, but does not necessarily have to use it. So it will pay interest only against those invoices which are actually discounted.
It’s not so hard to see the benefits here. For starters, the working capital won’t get tied up any more even if payments aren’t forthcoming quickly. Also, it is not like a real long-term loan, because every time an invoice is settled by a customer, it is no longer a part of the advance accessed by the customer.
Another benefit is that nobody else has to know of this arrangement, so customers and suppliers have no idea the company has already been paid. This removes the stigma that comes with taking out loans and being marked as a company in some kind of distress. Au contraire, the improved cash flow helps the company settle its own bills on time which helps build trust and reputation in the market.
There’s also a difference between standard loans and invoice discounting, as regard the amount. Standard loans are for fixed amounts, while the latter is pegged to a percentage of the sales ledger (usually around 80% to 95%). If sales go up, so does the amount available for discounting, and it does not need any reapplication on the company’s part.
It doesn’t need extensive documentation or any other collateral other than reporting regularly to the lender about the company’s current stack of sales invoices. Throw in the fact that this kind of business finance can be approved and availed of within 24 hours, and it’s no surprise that invoice discounting is very popular amongst growing businesses. In fact, it’s actually so good for running a smooth business that once the company gets used to it, it’s really hard to stop using the facility.
Searching for cheap invoice discounting to assist grow your business? Do some research before choosing receivable factoring
