What is invoice discounting?
To put it in a nutshell, it is a process where businesses leverage their receivables to get financing for short term requirements. Basically, they sell unpaid invoices to lenders or financial institutions and get a percentage of the invoice’s value as a cash advance. The funds availed through this method can then be utilized for the growth and expansion of the business, as needed.
But as compared to invoice factoring, there is some confidentiality involved here because customers are unaware that the business is borrowing against their invoice. This method guarantees fast access to cash, thereby improving cash flow. It is a common technique used by businesses that can’t wait for clients to pay their bills, in order to get capital. In short, it helps business owners get a short term loan by making use of unpaid invoices. Let us find out more!
What are the different types of invoice discounting?
Every invoice the business generates across the turnover is discounted to raise capital, irrespective of the requirements of the business.
It is also known as spot factoring, where single receivable invoices are sold to third parties to raise capital.
As is evident from the name, the entire process is conducted in a confidential manner. The suppliers or customers of the company are not aware that the business is raising capital against invoices before payment is received
How does invoice discounting work?
Due to the emergence of several fintech lending platforms such as KredX, Nemo’s invoice discounting partner, the process of invoice discounting is more streamlined than ever. Take a look at how it works:
- An invoice is prepared by the company against goods or services provided to customers.
- Details of such invoices are forwarded to the lender or financial institution.
- After going through the invoices, the lenders offer funds against a certain percentage of the total value of the invoices.
- The business’s credit controller or finance provider is in charge of collecting the invoice.
- When the debtor makes a payment against the invoice, the balance amount is sent to the business owner. Of course, a service fee is deducted.
Is invoice discounting right for your business?
It is natural to get overwhelmed with so many alternative finance options available. Invoice discounting is the right choice for your business if the following conditions are met:
- The bad debts of your business are minimal.
- Customers pay their bills on time.
- Credit control procedures are solid and effective (best suited if the credit management processes are carried out in-house).
- You give customers a time of 30 days (at least) to clear pending bills.
- The business meets the minimum level of turnover required by the lender.
What are the benefits of invoice discounting?
Swift cash flow
A lump sum otherwise tied up in unpaid sales and invoices can be released, while cash flow gets a boost. This technique of availing capital works best for businesses that have a smaller number of clients that generate high invoice amounts. Even a single unpaid invoice can give access to substantial capital.
Protection against bad debts
If you are lucky, your financier will offer protection against bad debts for your business as well. This added protection is helpful if customers turn insolvent and fail to pay against the invoice.
Financing can be available within 72 hours of applying, provided the paperwork and other documents are in order, which is much faster than traditional financing options.
More funding depending on invoice value
Other business loans and overdraft facilities offer funding only up to the stated amount, but with this method, you get more capital if you generate high-value invoices.
Invoice discounting is a relatively low-risk method for obtaining access to funds in the short term, but make sure you know the pros and cons before deciding to seek out this option for financing. Request for Invoice Discounting easily from Nemo’s business loans section.