What Is Invoice Discounting and Is It Right for your Business

What is Invoice Discounting and Is It Right for Your Business?

There are many aspects of business that needs consideration. One of which is invoice discounting. You may or may not have heard about this term. Either way, you’re going to learn all about it in this article. So, continue reading now to learn more about what invoice discounting is and whether or not it’s the right finance facility for your business.

Invoice Financing

Before we delve deep into this, it’s important to familiarize finance facilities and what it’s all about. A finance facility, also known as invoice financing, is a way for business to borrow money against the amounts due from customers. It can help businesses improve cash flow, pay suppliers and employees, and reinvest in operations. Basically, it’s an essential aspect of doing business that you need to understand to keep your company going.

What is Invoice Discounting?

Invoice discounting is a type of invoice finance facility; wherein it allows business owners like you to leverage the value of their sales ledger. When you send an invoice to your customer, a portion of the total amount will become available from the lender. It will then provide a great source of working capital throughout a period – usually a month.

This one is quite similar to the factoring of the invoice. However, the difference is that your customer may not be aware that you have taken on cash flow finance. While all of this is taking place, you remain in control of the sales ledger, collecting payments and sending out reminders as usual. Doing so will allow you to keep your preferred style of communication, as well as customer service standard.

How Does It Work?

By now, you already have an idea of what invoice discount is in theory. But how does it work exactly? This section will explain just that.

Once work is completed or orders were fulfilled, you will send out invoices accordingly. The proportion of each invoice is transferred to your bank account once the lender receives a copy of said invoice. The cash will then be used to repay debt, pay bills, or payment as part of both a short-term and long-term business plan.

Sending out your invoices right after the completion of work is key to successful invoice discounting. The reason is that it allows for regular cash flow throughout the period. Once the agreed percentage of each invoice has been paid, you can then collect payment from your customers as per usual. The general percentage is around 80 to 90 percent.

Charges and fees are deducted from the remaining balance and either remitted or claimed by the lender. Keep in mind that charges should always be transparent and the fee structure made clear by the financer. However, it should be according to all the other terms of the invoice finance discount. This manner will help you budget out your funds effectively. At the same time, it will also ensure the best use of each cash input.

By following this pattern, you will be able to make the most of your invoice discount strategy. At the same time, it will also open a multitude of possibilities for your business.

Types of Invoice Discounting

There are three different types of invoice discounting: confidential invoice discounting, invoice discounting fund limits, and whole turnover invoice discounting.

Confidential Invoice Discounting

This type of invoice financing is usually arranged confidentially. That way, customers and suppliers won’t be aware of the business being advanced capital against sales invoices prior to receiving payment.

Invoice Discounting Fund Limits

Many companies do not assess individual debtors using invoice discounting. Instead, they protect themselves against the insolvency of debtors by relying on the wider number of customers. In addition, they also demand that only a certain percentage of a business’s sales ledger can be made up of one customer.

Just like spot invoice factoring, selective invoice discounting is where single receivables are sold to a third-party business. Invoice factoring facilities are traditionally whole-turnover, while the entire sales ledger of a business must flow through the factor.

Whole Turnover Invoice Discounting

Last but not least, a whole turnover invoice discounting is different from the two invoice discounting methods mentioned above. The difference is that in an entire turnover invoice discounting, every invoice must be sold in a whole turnover invoice facility, regardless of the need.

Is It Right for Your Business?

There are so many finance options that you can choose. But why choose invoice discounting? Is it even worth it? Does this type of finance invoice fit with your business strategy?

According to Real Business Rescue, Invoice discounting is the perfect fit for your business if your:

  • Business has minimal bad debts.
  • Credit control procedures are comprehensive and known to be effective.
  • Customers have a minimum of 30 days in which they can pay.
  • Customers are known for paying on time or within the payment period.
  • Business meets with the minimum level of turnover required by the lender.

One of the primary considerations when deciding on an invoice finance option is whether or not you carry out credit management processes in-house. If you don’t, then invoice factoring invoice may be the more suitable financing option.

In addition, discounting services are also more widely available to established businesses rather than start-ups. By nature, they would not have any reliable turnover and credit management processes.

ReliaBills Can Help with your Invoice Discounting

At ReliaBills, our comprehensive invoicing system allows you to get an advance against your outstanding customer invoices. Whether it’s on a selective or whole ledger basis, ReliaBills has the features that will suit your needs.

In addition, you can also access the ReliaBills invoicing feature, which lets you create great-looking and professional invoices in a matter of a few clicks. Just select a template, enter the necessary details, wait a couple of seconds, and you’re all set!

For more information about how ReliaBills can help with invoice discounting, send us an email at sales@reliabills.com or call our hotline at 1-877-932-4557.

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