Invoice Discounting 101: A Comprehensive Guide to Boosting Your Business Cash Flow

Suppose you own a transformer manufacturing business. You have just delivered your last bulk order to an old client, who made an agreement to pay you after one month.

Today, you got a new order from another client but you don’t have enough capital to purchase raw materials.

Your last order’s payment is assured but you are unable to take this new order up.

This is where you can make the most of invoice discounting and fulfill your new order requirements without losing the offer!

Wondering How That’s Possible?

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Invoice discounting is a process of granting loans against unpaid invoices. These are granted by invoice factoring companies to independent professionals or lending companies.

The loan is usually a percentage of the invoice, which is granted by keeping the unpaid invoice for security purposes.

Once the invoice is paid, the invoice factoring company keeps the rest of the amount as remuneration for providing this service.

Over the years, invoice financing or discounting has become quite popular because it can boost cash flow.

Small-scale companies and start-up companies have made huge benefits from this service, as per studies. Gaining instant access to a company’s tied-up cash is possible with this service. Though a little percentage of the invoices are reduced, it has resulted in great cash flow in the long run.

So, now you must be interested to know whether invoice discounting actually works in boosting cash flow or not.

Here’s How it Does

Suppose Jennifer has started her own bakery and she’s getting a lot of orders. She has just delivered a huge order worth Rs. 1,00,000 to a biscuit company.

According to the agreement she made with the company, her invoice will be cleared after three months. At present, she is totally out of cash as all her investments have gone to making biscuits.

But, today morning, she got an amazing offer from a new restaurant to deliver pastries worth Rs. 70,000. She is in utter confusion because she doesn’t know how to arrange money for purchasing flour and other raw materials. If she can’t, she will have to lose the offer for sure as the new restaurant needs the pastries on an urgent basis.

At this moment, Jennifer thinks of getting bank loans but she can’t because of her low credit score. A friend suggests she opts for invoice discounting from a reliable factoring company and she does so. She calls up the company and contacts them.

They agree to offer her a small loan of Rs. 80,000 against her unpaid invoice. In the evening, she gets the amount, signs the contract with the new restaurant, and resumes work.

According to the invoice factoring company’s agreement, Jennifer will have to get the payment of Rs. 1,00,000 after three months from the biscuit company and pay the factoring company Rs. 20,000.

She has already got Rs. 80,000 from the factoring company. So, they are taking 20 percent of the invoice and the amount will be distributed this way. In the future, Jeniffer will be able to get new loans against her unpaid invoices.

What are the benefits that set invoice discounting apart from bank loans? Here’s the answer!

• Bank loans require a high credit score and other paperwork, which makes it a tedious process. On the other hand, invoice discounting requires unpaid invoices and less paperwork, making the process smoother and easier for the lender.
• In bank loans, the lender has to pay interest on a monthly basis and the lock period is huge. In invoice financing, the repayment is shorter than in bank loans.
• Bank loans often involve unnecessary fees, which can lead to debt. But, invoice financing is much more secure because it gives the lender complete control over liabilities.
• The time it requires to take bank loans is much longer than invoice financing. Hence, companies that need money urgently can depend on invoice financing.

So, the above advantages are the reasons why more and more companies are opting for invoice financing over traditional borrowing.

If you are on the lookout for an Invoice discounting company providing reliable service, you can contact us right away.

We at Finworks 360 provide invoice discounting at a very nominal percentage of interest, which makes us one of the most trusted factoring companies of our esteemed clients.