What is Invoice Discounting?
It is an entirely new and different approach and an alternative solution as opposed to traditional business finance. Any company who needs additional cash but is facing different troubles regarding approval of loan can look up to invoice discounting. Before invoice discounting was introduced, companies and individuals suffered a lot at the hands of traditional invoicing. If a customer bought an item, the company used to invoice the customer along with extending its credit.
This founded the basis of invoice’s due date resulting in net 30 or net 60. If the invoice was paid in 30 days, still, the company had to pay the operating expenses as well as its suppliers. As the company did not have all the money from the customer, costs had to be recovered in one way or the other. With the help of working capital, the gap between receiving full payment and managing operating expenses and suppliers was adjusted. The company had to borrow money if it lacked in the account of working capital. It created many complexities.
Invoice discounting, on the other hand, is a financing option which is best suitable. It allows a company to go for a loan even beyond the particular value of its outstanding invoices. The loan may constitute 95% of the accounts receivable. Fixing the accounts receivable for finance entirely depends upon the lender. When the loan is approved, the company immediately receives an advance payment.
Sometimes, invoice discounting is confused with invoice factoring. However, both are different in reality. You will come across those differences along with some plus points of invoice discounting throughout this article.
Advantages of Invoice Discounting
Invoice factoring comes with lots of issues on the side of customers and clients. Invoice discounting proves to be a relaxing option which does not incorporate many formalities and is also easy to access in case of urgent finance raising.
For instance, Scottish Pacific provides a lot more solutions and answers to your queries in a well-detailed manner. If you are looking forward to invoicing discounting, it will surely help you in smartly financing your business.
Invoice Discounting is Faster Than Traditional Financing
If you have previously applied for a loan, you must be aware of the long, frustrating process. Banks hesitate to give small loans because of less profit margin. Moreover, the process of loan approval is so durable that it takes no less than a few weeks to a whole month. If you want to avoid this headache, go for invoice discounting. It only takes one or two days to get your loan approved.
Invoice Discounting Improves Cash Flow and Working Capital
Cash flow and working capital, both are entirely different things. Cash flow is taken as the full cash which is flown into and out of the business over a certain period of time. Working capital, on the other hand, is the difference resting in short term liabilities and short term assets.
As invoice financing produces much cash, therefore, cash flow increases at a rapid pace. A company should have strong working capital even if cash flow is poor. Working capital allows the company to pay its bills without depending on any other factor. If the situation is reversed, enough cash flow must be present to cover up all the expenses.
Invoice financing plays a role in maintaining working capital and cash flow. Additional cash helps a lot in managing both the scenarios mentioned above.
Invoice Discounting is Low Costing
0.5% to 5% fee is usually involved in invoice factoring which is estimated against the worth of accounts receivable. When a loan is raised, another fee is also associated with it. On the contrary, the fee value of invoice discounting ranges from 1.5 to 2.5%. No other charge is attached to this calculated sum.
Invoice Discounting provides Flexible Terms and Conditions
When going for such procedure, you are supposed to hand over your complete list of accounts receivable to the company which is factoring the whole process. With this, your A/R gets locked for some time. However, in invoice discounting, no such term or condition is applicable. You, yourself, can decide your A/R in order to manage your finance.
Invoice Discounting Increases Inventory
Inventory shortages occur when a company faces cash flow issues. The company may allow the placing of orders but finds it difficult to complete orders because of deficit finance. As invoice discounting provides an additional sum, the company efficiently manages finance issues and also compensates its inventory.
Invoice Discounting new to gives Simple Fee and Execution Structures
In invoice discounting, Discounting new financing company is allowed to get involved in the collection of any fee or other finance; therefore, you remain the owner and manager of your A/R collection. There are pros and cons to every situation. You will not have to worry about the process alteration or the integration of the new to the firm.