Invoice discounting procedure, interest rates and impact

Invoice discounting is one of the ways by which a business owner can financially grow. It is not just a good funding option for business that are facing cash flow problems but also help the business in real growth. Whether your business is at the startup stage or you are looking to take an established and successful business to the next level. Invoice Discounting could be a flexible and competitively priced option for you.

In order to know all about Invoice Discounting, first we need to understand what this term says: 

What is Invoice Discounting?

For Day to day expenses and cash flows can be easily determined through Invoice Discounting. It could help pay off small business loans, quick business loans, equipment financing, collateral free loans or a working capital loan. It helps understand and shape a better flow in terms of clarity of what is flowing in and what is out of the business. You retain the complete aspect of everything related to cash flow.

Procedure- How does invoice discounting works?

  1. Small Business raises Invoices against the Big Corporate (Enterprise/Blue-chip Company) for the services provided/goods supplied.
  2. To avoid the delay, they can bring their invoices to an Invoice Discounting companies such as Cashofyfor confidential invoice discounting.
  3. In 1-2 days, these invoices are converted to cash and transferred to small businesses at a pre-set discounting rate and tenure (normally ranging from 30-120 days).
  4. Small Business completes multiple business cycles in this tenure and upon release of payment from corporate, repays the Invoice Discounting Service Provider.

Discounting invoices hence provides businesses funds upfront rather than waiting for 30-120 days. The completion of multiple business cycles further helps in improving cash flow and increasing revenue rather than limiting operations due to lack of funds.

Rate components

Finance companies can use numerous costing structures. However, the most common pricing method involves using two fees: the service fee and the discount.

  • Service fee: The service fee is one-time charge to every invoice that is submitted. It’s based on the total value of the invoice.
  • Discount: The discount fee is charged on the utilised/advanced funds. It’s calculated daily and charged monthly.

Impact of Invoice Discounting on your business

Positive cash flow

There can surely be no smarter way of keeping a positive cash flow than Invoice Discounting. The perfect world where customers pay immediately doesn’t exist so this is the next best thing. The money is in your bank account much faster, making it less likely your business will run out of cash while it grows.

Get cash fast 

In case your business already has a number of outstanding invoices, an Invoicing company may be able to pay a high percentage of them to you quickly.

Better financial planning

Because you know exactly when the money will hit your account you can take much more calculated financial risks. You may also find it easier to borrow capital as you can prove a regular cash flow and attract investors.

Have more knowledge about your customers

Many companies insist on credit checking your customers before you offer them credit. This reduces risk for everyone. There’s no point selling something to a customer who doesn’t have the means to pay.

Highly competitive industry 

There are a lot of players in the industry, which is great for keeping prices low.

Makes you seem more professional

Some customers may respect an Invoicing company more than you (!) meaning they may pay more quickly. If you use the invoicing services offered by the big name banks then this could be the case.

Avoid bad debts

If you enter into something called “non-recourse invoicing”, the Invoicing Company is responsible for the debt if it turns bad. Of course this works out more expensive than “recourse invoicing” where any debt problem is still yours.

Related Topic: Supermarket POS software: Usage, benefits, and Providers

By | 2018-08-06T07:01:11+00:00 November 30th, 2017|Uncategorized|0 Comments

About the Author:

Pulkit Jain is the founder of LegalRaasta – India's top portal for registration, trademark, return filing and loans. Pulkit is a veteran CA with over 10+ of experience.

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