How do vendors avail bank based invoice discounting?

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08 min read.

More often than not, vendors face the problem of unpaid invoices or late payment of invoices from their clients and customers. This affects their profitability since it may affect their ability to meet their working capital requirements.

What is invoice discounting?

Invoice discounting or bill discounting is how businesses convert their unpaid invoices into cash necessary for working capital. This is done by selling the rights to the unpaid invoices to a bank or financing company in exchange for a discounted final settlement. The bank or financing company later receives the full payment from the debtor.

Bill discounting is opted for by businesses that cannot afford to wait until their clients pay the bills. These businesses are usually in urgent need of cash to run their operations.

Who is eligible for bank-based invoicing?

The banks approve selective businesses with very selective vendor bases to opt for invoice discounting. Normally, businesses with a high credit rating will be given the nod of approval. Certain factors determine eligibility:

  • Proof of how long the business has been in existence
  • Nature of business
  • Volume of the business and annual turnover
  • Financial stability
  • Credit history, history of repayment, credit track record
  • Networth and profitability of the business
  • Credit rating of the business
  • Defaults on outstanding loans, if any

Why is bank-based invoice discounting no longer an effective option?

  • Slow, inefficient processing of transactions
  • Manual uploading of invoices
  • Extensive paperwork and lengthy approval process
  • No savings in terms of time or money
  • Technological obsolescence
  • Prone to regular outages

The technology on which the bank servers run is relatively slow and outdated. In a world that runs on quick, efficient technology, the slow processing and laborious tasks involved in these transactions slow down the overall process.

Process of availing bank-based invoice discounting

  • The seller sells the goods on credit, during which the invoices are raised
  • When the buyer accepts the invoice, it translates to him agreeing and acknowledging to pay the amount on the due date
  • The seller then approaches the bank for discounting of the invoice
  • Assurance is given to the bank based on the creditworthiness of the buyer
  • The bank makes the disbursement of funds to the buyer after all the deductions (e.g., discount, bank fee, and margin)
  • This way, the seller receives funds immediately, which can be utilised where necessary.
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