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Invoice discounting is can be considered as debtor finance. It helps those companies which are having cash flow problems as the customers are paying invoices in 30 to 90 days. Offering payment terms is mandatory while working with large commercial and industrial customers.

However, allowing clients to pay in 30 to 90 days affect the business cash flow, especially when your financial reserves are not sufficient for paying the corporate expenses. Invoice discounting helps you in improving business cash flow and along with this it helps to position your company for further future growth.

Invoice discounting is the financial instrument which uses a company's unpaid accounts receivable as collateral for proving finance or we can say loan, which is issued by a finance institution. This is considered to be an extremely short-term form of credit or borrowing, since the finance company have the power of altering the amount of outstanding debt when the sum of accounts receivable collateral changes. The amount of debt issued by the finance company is always less than the total amount of outstanding receivables which is typically 80% of all invoices that to less than 90 days old.

With Invoice Discounting, your business always retains control over its own sales ledger and the payment can be chased in the usual way. Your clients pay you directly; no third party involvement is known by the customer.

Who uses Invoice Discounting?

Invoice Discounting is particularly suited for the business in specific areas such as:

  • Construction
  • Recruitment
  • Manufacturing
  • Wholesalers
  • Printers
  • Couriers

Key points

  • It is confidential
  • Enables cash flow
  • Provides fast funding
  • Can be availed within less time
  • Provides security of your payment

But in any form of business which provides products and services to other businesses and provides clients with credit terms of 30-90 days, Invoice Discounting is the key for solving the problems as these are associated with slow payment.

Advantages of Invoice Discounting

  • check_circle_outlineReleasing up to 80% of the value of your outstanding invoices within 24 hours.
  • check_circle_outlineSimpler than standard business loans.
  • check_circle_outlineFunding can be secured without putting any assets on risk.
  • check_circle_outlineCash is freed up in terms to overcome the cash flow problems.
  • check_circle_outlineThe amount of available funding increases with business turnover.
  • check_circle_outlinePaying seller’s invoices directly increases your power to negotiate over discounts.
  • check_circle_outlineInvoice Discounting finance is competitively priced.
  • check_circle_outlineInvoice Discounting providers provide you with excellent business guidance.

Easier to get than bank financing

Invoice discounting is easier to avail than the conventional bank financing. Companies that meet the following criteria usually qualify for funding:

  • Companies having good commercial credit.
  • Who can’t afford the wait for 30 to 90 days to get paid by customers Are in need of funds for paying business expenses.
  • Do not have accounts receivable that can be pledged as security.
  • Do not have any sort of financial or legal problems.

For complex situations, or applications that demand for large amounts, the applicant may require to submit some additional information.

Key features

  • Invoice discounting is a perfect alternative solution for the traditional form of business finance.
  • It can provide instant access over the cash which is tied up with outstanding invoices.
  • It adapts with the changing business environments as they change and grow, which results in making it much more flexible when compared to other modes such as an overdraft or loan.
  • You can still maintain control on collection of payments, making this financial facility entirely confidential.
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FREQUENTLY ASKED QUESTIONS

1. What is invoice discounting?

When a company requests for a loan by keeping its unpaid account receivables as collateral, the process refers to invoice discounting. In this type of financing, the financer can alter the amount of the debt as soon as the amount of accounts receivables, kept as collateral, changes; hence the form of the loan offered is also short term.

Also considered as debtor finance, invoice discounting eyes to benefit companies having cash flow problems, as their debtors are expected to pay invoices not before 30 to 90 days. If a company is facing problems with their financial reserves being insufficient to pay corporate expenses, allowing clients to pay in 30-90 days can affect the cash flow of the business. With invoice discounting, instead of waiting for customers to pay within the normal credit terms, companies receive the cash as soon as the invoice is issued; thereby getting an accelerated cash flow from the customers.


2. How does invoice discounting work?

  • Companies provide goods and services to customers and make an invoice
  • Details of invoices are sent to the financer
  • Financer provides the funds based on the amount of the invoices, usually within 48 hours
  • Companies gets back the balance of the invoice once the debtor pays back

3. What is the difference between bill discounting and factoring?

Bill discounting Factoring
Control of sales ledger has to be taken by the business Control of sales ledger is taken by factor
Suitable for small businesses Suitable for large businesses
No assignment of debit Assignment of debit
Bill is discounted and paid when the transaction takes place Maximum amount is paid in advance and the rest is paid at the time of settlement
Always recourse in nature Can be recourse or non-recourse
Falls under negotiable instrument act, 1881 There is no specific law for factoring
Parties involved: drawer, drawee, payee Parties involved: factor, debtor, customer
Financier charges fees in the form of discounting charges or interest Factor charges fees in the form of interest and commission for the services

For more detailed information about their key differences you can visit Bill discounting vs factoring.


4. What is bill discounting?

Bill Discounting can be considered as a process of selling the bill to the third party which can be a bank or financial institution before its date of maturity, at an amount which will be less than its par value. The discount given against the bill is based on the remaining maturity time as well as the risk involved in it.

First of all the third party satisfies their firm regarding the drawer’s credibility, before advancing them with money. After knowing with the creditworthiness of the drawer, the financial institution will grant fund after deducting the relevant discounting charges or interest. When the financial institution purchases the bill for the client, it becomes the owner of the respective bills. If the client delays the payment, then he is supposed to pay interest as per prescribed rates.


5. What is factoring?

Factoring is a transaction process in which the customer or borrower sells its book debts to the financial institution called factor at some particular discount. Having purchased receivables the financial institution finances, money to them after the deduction of the following:

  • An appropriate margin
  • Interest charges for the financial services being provided
  • Commission charges for the supplementary services

Now, the customer forwards the collection of payment from its buyer to the financial institution or the customer may ask to forward the payment to the financial institution or to the factor to settle the balance dues. The factor provides the following services to the customer: Credit investigation along with debtor’s ledger maintenance, collection of debts from the buyer, credit reports on debtors and so on.

For more detailed information visit receivable factoring, reverse factoring and invoice factoring.


6. What is receivable discounting?

A receivable can be seen as a promise for future incoming value towards a business organization. This can be monetary worth as well as capital worth. It becomes important to know that it is considered as a future being defined as a value flowing to the business and it is usually not received at the point when a transaction is made. In the most basic form, it will be seen as an invoice which is submitted to the end buyer when a commodity is purchased. The reason because of which the consignments are not paid for on purchase is due to the end buyer being provided with credit days from the seller.


7. What are the key features of invoice discounting?

  • Perfect alternative solution for traditional business form
  • Cash flow remains unaffected as instant cash is provided over cash tied up with unpaid invoices
  • Adapts with the changing business environments as they change and grow
  • Companies retain control on collection of payments

Want more information about invoice discounting? or looking for most suitable finance solution for you? Talk to our finance experts now.

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