When it comes to running a business, consistent cash flow is a key concern of the majority of business owners and entrepreneurs. As a matter of fact, research has shown that almost 80% of small businesses struggle to maintain adequate cash flow during the first five years of business operation. More often than not, you may have customers while the expenses are due, and you would not have enough time to wait for unpaid invoices to be cleared. This is when bill discounting can be an excellent form of financing for you.
What Basically Is Bill Discounting?
Bill discounting, also known as invoice discounting, is a way to get money for unpaid customer invoices in a lesser amount of time. Invoice discounting is considered to be one of the simplest forms of invoice finance. To define it in technical terms, invoice discounting is the method of utilizing a company’s unpaid accounts receivable as collateral for a loan. This loan can be issued by a bank or a finance company.
Such loans are generally very short-term borrowings as the finance company can change the amount of debt outstanding when the amount of accounts receivable collateral changes. In simpler terms, invoice discounting helps businesses to get instant cash that is tied up in unpaid invoices, increasing the value of their sales ledger.
How Does Invoice Discounting Work?
Invoice discounting and invoice factoring are two common invoice finance methods used by businesses. Although, the primary difference between the two is the fact that invoice discounting is more confident than invoice factoring. Invoice discounting basically works as a series of short-term business loans where your unpaid invoices are used as security. The lender offering the loan knows that you are owed the money, and will pay you the majority of it before the customer has actually paid for it.
The primary purpose of invoice discounting is that it offers the business a cash flow boost. That being said, there are several things to know about invoice discounting. Firstly, the amount of debt issued by a finance company is generally lesser than the total amount of outstanding receivables. This amount typically ranges around 80% of all invoices which are less than 90 days old. Any finance company generally allows a percentage of all invoices outstanding, which is to ensure that the loan is distributed upon a spread of receivables from many customers preventing the loss of collateral.
When Do You Need Bill Discounting?
Invoice discounting is a better option for businesses that have relatively high-profit margins. This is particularly because the finance companies charge higher interest rates for this form of financing. Invoice financing is most common in high-profit businesses that have a huge growth index. They need instant cash flow to fund their rapid and additional growth.
When Is Invoice Discounting Not Possible?
While invoice discounting is a simple form of financing, under certain conditions, it is impossible. This is when and if any other lender already has blanket title to all the business assets. In the form of collateral on a different loan. Under such situations, the other lender would have to waive off its right to the accounts receivable. Collateral to make the invoice discounting process go through.
The Benefits of Invoice Discounting
Let us take a look at why invoice financing is a great option for businesses:
- Finance companies that offer invoice discounting provide loans. Those are of values up to 95% of the total unpaid invoice value. This means you get almost the entirety of the amount of the unpaid invoice. Within only a few days instead of waiting for weeks for the invoice to be cleared.
- The repayment is also pretty seamless and hassle-free and the business can pay. The loan back when the customer pays the amount.
- Invoice discounting is a great way to accelerate cash flow from customers. This can be a very critical advantage in situations. Where a business is in need of urgent cash for any specific purpose.
- Invoice discounting is a completely confidential process, and no third party accesses or controls the sales ledger.
- Such loans do not require any assets collateral.
You need to make a very firm and clear decision when choosing to go for invoice financing. If you think it is necessary for the growth and successful operation of your business, then you must go forward with appropriate preparations. You can also take advice from an accountant or a reliable finance company to understand what is at stake and how you can make the most from bill discounting!