Get short-term loans from the Discounting company to manage the company cash flow in collateral of unpaid invoices….
Are you suffering from cash flow issues? Are you feeling hard to manage the employees wages and suppliers payments? Are you afraid of your business expansion? A business can only run with cash.
When the company faces cash flow issues, the owners feel tough for finding answers to their unsolved questions. How to overcome this delegated situation? How to save your business from this cash flow? Through Invoice Discounting
In this article, we discuss the meaning of Invoice Discounting, it's working procedure, and its benefits.
What is Invoice Discounting?
Now-a-days, companies are struggling to get bank loans because of their poor credit score. To escape from the irregular cash flow, Invoice Discounting is one of the best methods to solve your problem in the short term.
The invoice Discounting method follows similar policies related to Invoice Financing. Invoice discounting is a method by which a company gives its unpaid invoices as collateral to the discounting company.
To manage your company cash flow, the company will borrow money for the short term. The discounting company scrutinizes all the invoices and the history of their customers. Once, they are satisfied, they will issue 90-95% of the invoice value to the business owners within a week.
The invoice control does not go into the hands of the discounting company. Still, the company follows a responsibility for collecting the customers pay on time before the due date. Once, you receive the invoice payment from the customers, you should return the money to the discounting company.
Invoice Discounting is entirely different from Invoice Factoring. In the invoice factoring method, the entire control is in the hands of the factoring company. It cannot maintain confidentiality and secrecy from the customers.
Working Procedure of Invoice Discounting
Step 1: The company sells goods or services to their customers and sends their invoices with a due period of 30 days
Step 2: To save your company from negative cash flow, you are implementing the Invoice Discounting method in your concern.
Step 3: The company owner approaches and borrows money from the discounting concern in exchange for your unpaid invoices
Step 4: Once they receive the unpaid invoices, they will scrutinize invoices and eliminate the risky ones. After that, they reduce the small percentage of the unpaid invoices for their fee.
Step 5: The company owner is responsible for collecting the invoice amount on the due date. The credit control is not in the hands of a discounting company
Step 6: The company should settle the payment to the discounting company once you receive money from the customers. In addition, you should pay a small percentage of the fee charged by the discounting company.
Is Invoice Discounting Suitable for Your Business?
Invoice Discounting is suitable for businesses with high sales turnover and more profits from your business. It is not perfect for startups with irregular sales and profits. Invoice Discounting suitable only for businesses with rapid sales, and they can approach the discounting company when they are running out of cash.
The business owner can implement the Invoice Discounting method only when they have:
- Proper sales and profits report
- The company has an invoice management department
- Customers make the prompt invoice payment within 30 days
- You have a high sales turnover, and the customer payment history is good
- You should have a good customers credit report
So, Invoice Discounting is not suitable for startups and concerned with uncertain sales. It is effective for mega concerns with high profits and high turnover.
ADVANTAGES & DISADVANTAGES OF INVOICE DISCOUNTING
Advantages of Invoice Discounting
1. Fast Access to Cash Than Bank Loans
Invoice discounting works fast compared to traditional bank loans. The processing of bank loans takes more time, and you should complete more procedures. But once the discounting company scrutinizes the unpaid invoices and if it is valid, they will access to get cash within two to three days. The processing speed is good, compared to bank loans.
2. Maintain Secrecy with Clients
In Invoice Discounting, you can maintain the secrecy of your cash flow with the clients. Unlike the Invoice Factoring method, you should alert the clients about the negative cash flow.
But Invoice Discounting saves the owner from worry without disclosing the cash flow problem in the company. This method saves a business reputation from downfall and maintains a great relationship with customers forever.
3. Collection Control is in the Hands of Business
In Invoice Discounting, the company is responsible to collect invoice payments from customers on the due date. It is not the responsibility of the discounting company. So, this method helps to build a great rapport with the customers.
4. Suppliers Payment on Time
In traditional loans, businesses are restricted from using the whole liquidity without bank approval.
But in Invoice Discounting, the discounting company understands the importance of cash flow and makes the process work fast. Once, the invoices are raised and valid, you can pay the suppliers amount on time.
So, you can expect a discount and negotiate with your supplier for early payment.
5. No Limitation on Using Cash
Businesses can use cash for different purposes. From business expansion, making investments, and maintaining working capital to suppliers payment on time. It is not necessary to show the reason for spending cash to the discounting company.
Disadvantages of Invoice Discounting
- Not Suitable for Startups
The discounting company expects only the company with high sales turnover, high-profit margins, and accurate sales reports.
They expect good customer credit and a low level of bad debts. Now, the discounting company feels secure to accept your unpaid invoices and provide immediate cash.
So, it won't work for startups and companies in the growth stage.
2. Costs Are High
Since the business lends cash for a short term, the discounting company charges high fees for their maintenance, and the risk bearable.
It comes with a high cost compared to bank loans.
3. Reduction in Profits
The charges of the discounting company are high. Sooner or later, this affects the profitability of the company. Only the business owners can manage the profits by finding more new opportunities.
4. Do Not Borrow Money Too Often
The company follows an ineffective norm when they borrow too much money with the help of unpaid invoices.
It affects the growth of the company in the future. When you frequently follow this practice, give close attention to your payment cycle of customers, profits, turnovers, and cash outflow.
In this article, we cover invoice discounting, the working procedure, advantages and disadvantages of invoice discounting. I hope you get a clear idea about this method and its suitability for your business.
Invoices play a huge role in businesses. Our InvoiceTemple is one of the best invoice software. It is trusted more than 40,000+ business owners in the market. It helps to create invoices within minutes and helps to organize your finances in one place. So, try Invoice Temple for free and create the first five invoices. Then upgrade to the premium version.
What are the views of this article? Let us know your valuable comments in the below section of our article.