Invoice discounting is the purest form of invoice financing. The platform works by selling unpaid invoices to a lender. When accepted, the lender will give you a percentage of the value of the invoice as a cash advance. When your in-debt customer pays the invoice, the lender will provide you with the remaining balance less the applicable fees
Hence, a short-term form of borrowing. It can substantially accelerate the cash flow from customers. Instead of waiting for customers to pay you according to the credit terms, you can have the cash immediately by selling the invoice to the lender.
This invoice financing usually is confidential. You will continue to deal with your customers as usual. They will not know that you are using a finance provider. The downside of this platform is that you still have to chase the debt of your customers.
The lending firm will earn in both interest rate and from the monthly fee to maintain the arrangement. The basis of the interest is on the amount you will borrow.
The lender would not accept the credit application if the invoice were already in the blanket of another lender.
How invoice discounting works operationally?
The invoices of your work shall be sent every day. The lender will deposit the pre-agreed proportion to your bank account. You can immediately use the money to pay bills, repay debt, or part of a long-term plan growing of the business.
The borrower will send a monthly accounts receivable report to the lending firm. The borrower shall aggregate by categories the receivables. The lender will use the information to adjust the amount of debt that the lender is willing to give to the borrower. Hence, the borrower will retain control of the accounts receivable. The latter is responsible for extending a credit line to the customers, invoicing them and collect payments.
Moreover, this platform best works with companies with high-profit margins. They can easily absorb higher interest charges. It is common among business that shows and rapid rate that needs cash flow. The credit platform may not be too useful for newbies and self-starting business.
Is invoice discounting right for you?
There are different alternative financing schemes available in town. Often, it can be challenging to know which one is perfect for you:
- If your credit control system of your company is reliable and useful, then invoice discounting is right for you
- when you have minimal bad debts, then invoice discounting is right for you
- Your customers are diligent in paying their accountabilities, then invoice discounting is right for you
- If your policy set a minimum of 30 days for customers to pay, then invoice discounting is right for you
Discounting credit services is widely available for established businesses and not for start-ups. The starters may not be too reliable yet in credit management procedures.
Negotiating the best invoice discount terms for you
As discussed earlier, there are so many companies offering discounting services. It will be better if you can seek advice to credit professionals. These professionals can help you decide on which type of financing that suite will for you’re as well as terms that you can negotiate with the lender.
Some companies are flexible. If you cannot meet the criteria, you can always negotiate. Lenders can offer a limited amount of cash for your advance, or higher rates especially when your business will be considered highly risky. Sometimes, it is on how you compose yourself and your company to the lender to get the feel and trust. When you get them, you can confidently negotiate some terms.
Lenders can reduce their fees if your company can achieve specific or a targeted number of invoices that have been sold.
Terms you need to consider?
Part of the terms and conditions that you asked to include is the ‘with recourse.’ It means that the lender has the right to claim back money if your customer could not pay. The alternative to this is ‘without recourse.’ It is beneficial if you have any doubts regarding your customers’ ability to pay in the long-term. However, you will be asked to pay an additional fee for discounting “without recourse.”
In brief, the invoice discounting can offer a range of potential benefits to businesses operating in all industries. No doubt, it is a reliable source of working capital available to use throughout each month. Also, it offers unlimited opportunities. You can have the chance to plan for growth in a sustainable way.