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Invoice Discounting

Updated on

08 min read

Invoice discounting is a way to generate cash by keeping sale invoices as collateral with the financing institution by paying a service charge before the due date. It improves the working capital of the organisation.

What is meant by invoice discounting?

Invoice discounting enables the business to obtain a loan by keeping its trade receivable as collateral. A certain percentage of trade receivables is issued as a loan. This is a very effective financing solution as businesses receive advance cash due from customers through invoice discounting.

Purpose of invoice discounting 

Invoice discounting increases the cash flow in the business organisation. This fund helps to accelerate additional growth. Here, instead of waiting for the customers to pay, one can discount the sales invoices from the lending institution to meet its cash requirements.

Who carries out invoice discounting?

  • Invoice discounting company- Any company such as manufacturing, logistics, FMCG, pharmaceuticals, etc., can avail invoice discounting facility. It is a type of loan wherein funds can be availed against unpaid sales invoices.
  • Lending institution- The lending institution charges a service fee for providing short-term loans against the unpaid sale invoices. 

Invoice discounting process

  1. A business entity prepares invoices for goods sold to customers.
  2. These invoices are then sent to the lending institution for raising funds.
  3. The lending institution verifies the invoices and issues funds as per agreed terms. The funds are issued as a certain percentage of the invoice value.
  4. The invoice amount is collected by the business entity or the lending institution as per the agreement terms.
  5. When the customer makes a payment against the invoice, the amount received more than funds issued is returned to the business entity after deducting its service fee.

Advantages and disadvantages of invoice discounting

Below are some of the advantages of invoice discounting:

  • Availability of cash- By using this type of financing, one can easily avail funds within 72 hours of applying. It is beneficial for businesses generating high-value invoices. A single unpaid invoice keeps a huge fund tied up.
  • Protection from bad debts- A few lending institutions also provide protection against bad debts by charging a fee for additional services. 
  • Confidentiality- One can enter into a confidential invoice discounting if they fear losing customer confidence. 
  • Higher funds- As the business grows, one becomes more eligible to avail higher funds based on trade receivables.
  • It brings a solution to slow payment. The funds raised can be used for business cash flow and dies to provide the necessary capital for business growth.

Below are some of the disadvantages of invoice discounting:

  • Meet eligibility criteria- Small entities may not fit into the eligibility criteria of the lending institution. However, businesses can overcome this disadvantage by building a steady track record, instilling confidence among financers.
  • Increase in cost- The financers charge a huge fee for providing invoice discounts. This will increase the business cost.
  • No help in getting payments from customers- Unlike factoring, this discounting method does not provide any assured facility or assistance in collecting unpaid sales invoices.

Types of invoice discounting

  • Whole turnover invoice discounting- In this type of invoice discounting, one can avail loan on each invoice generated in the business. Thus, funds can be raised on the total turnover.
  • Confidential invoice discounting- This type of invoice discounting ensures confidentiality so that the customers and vendors of the businesses won’t come to know about such type of business arrangement.
  • Selective invoice discounting- Only selective party invoices are given as collateral for raising funds under this type of invoice discounting.

Analysing the viability of invoice discounting

There are various financing options available in the market. Now the question arises, how to decide whether invoice discounting is suitable for your business? There are certain factors-

  • Lower chances of bad debts.
  • Receipt of timely payments from customers.
  • Meeting minimum turnover levels for availing this financing facility.
  • Robust credit control measures are being followed in the organisation.

If a particular organisation meets all the above factors, it can go for invoice discounting.

Comparison between invoice discounting and invoice factoring

Invoice factoring and invoice discounting are similar. In both types of financing agreements, funds are issued against unpaid sales invoices. However, the fundamental difference between factoring and invoice discounting is managing the credit control process and collecting payments from customers. 

In factoring, the lending institution manages the sales ledger and credit control process. The responsibility of collecting money from customers is that of the financing entity. Here, the lending institution buys the sales invoice.

In invoice discounting, the responsibility of collecting money from customers is that of the business entity. Thus, complete confidentiality is maintained in this type of financing arrangement. Here, the sales invoices are just used as collateral for providing short-term loans.

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  2. Supplier portal, or vendor portal, is an online platform consisting of a suppliers network. Get complete details about the supplier portal.
  3. RBI’s announcement of an increase in NACH Mandate Limits for Trade Receivables Discounting System settlement (TReDS) from Rs.1 crore to Rs.3 crore.
  4. Rules and regulations governing invoice discounting procedures and practices are covered in detail in this article. Read on to know more.
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  6. The most common problem that MSMEs encounter is liquidity, often resulting from delayed payments from customers. Bill discounting platforms help.
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  8. Invoice approval workflow includes the review and approval of invoices before the payment for the same is processed. Know more about it.
  9. Supplier management is an important procurement process as they play a crucial role in the running of an enterprise. Know more about it.
  10. Vendor communication is exchanging information between the buyer/anchor and the vendor. Know more about the term and the process
  11. Maintaining optimum levels of working capital is essential to meet operational expenses, which helps achieve the company's goal and generate profits.
  12. Channel financing is a structured financing programme that offers working capital funding to the supply chain stakeholders (the buyers and the sellers).
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  14. Managing the working capital cycle effectively optimises an company's operating cycle, reduce its cost, and maximise return on its investments.
  15. Supply chain financing offers short-term credit that improves working capital and liquidity to both the seller and the buyer.
  16. Supply Chain Finance is a cash flow solution that helps businesses free up their working capital trapped in the supply chains. Know its tech side
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  22. Unpaid invoices often prove to hinder smaller businesses since they have limited sources of working capital. Invoice discounting comes to your rescue.
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  24. AP Automation is a technology with digital systems to reduce manual and repetitive tasks, identify duplicate invoices, approve invoices at multiple stages.
  25. Open banking APIs is growing around the world in the banking sector. Indian banks have started adopting open banking APIs to enhance customer satisfaction.
  26. A QR code facilitates the digitisation of invoices. It also meets customer preferences by ensuring swift and easy payments. Know how it works.
  27. Invoice validation is a part of invoice management wherein all the vendor invoices are reviewed carefully for any errors or discrepancies.
  28. 2-way and 3-way matching in accounts payable is a vital task for an organisation. Understand the documents, the process and how the Clear team helps you.
  29. Supplier financing looks to help small businesses by providing them with credit facilities for their various business functions. Know more.
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  31. Bill discounting may be the right solution for a business when availing business loans isn't an option. Know more about bill discounting features in detail.
  32. Invoice discounting is a financing alternative to use sales invoices as collateral to access loans from financing companies. Know how to reduce risks
  33. PO flip is an automated process of transforming a purchase order into an invoice. Read about the tools for PO flip and steps on Clear Platform.
  34. Invoice factoring is different when compared to Supply chain finance. Know more about both these two terms in detail through comparison.
  35. Reverse factoring is the opposite of factoring. Factoring is a financing option where company sells its unpaid invoices to the factoring institution.
  36. Challenges with regard to working capital prove to be relatively taxing, placing doubts on their survival in the long run. Know more about it.
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  38. Trade discounts or early payment discounts have many benefits to the buyers. The article explains the same in detail. Read on to know more.
  39. Dynamic Discounting vs Traditional Trade Discounting is different. Know the meaning and key differences between the two terms.
  40. Working capital financing is an important financing tool for funding an organisation’s short-term business requirements, mainly its working capital.
  41. Working capital credit is essential for many businesses in carrying on day-to-day operations. A working capital loan by NBFC or bank is given on conditions
  42. Invoice discounting or bill discounting is how businesses convert their unpaid invoices into cash necessary for working capital. Know how it's done by banks
  43. Invoice to pay and accounts payable workflow outlines the steps from invoice receipt to the point of payment of those invoices. Know more.
  44. A working capital loan helps the business meet its short-term financing requirements. There are many options available in the market. Know more.
  45. Vendors must issue compliant invoices to buyers. As a buyer, it is their responsibility to cross-check if details therein are accurate and complete.
  46. Vendor invoices must be essentially validated as a part of the accounts payable process to identify errors, to process and pay an accurate amount to vendor.
  47. Dynamic discounting vs traditional invoice discounting needs to be understood to avoid confusions while choosing the best alternate financing options
  48. Invoice discounting helps a business realise its invoices faster than waiting for the credit period to expire but also comes with certain risks.
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  52. Selective Invoice Discounting involves a company selling its invoices at a discount to raise immediate funds. Know more about its uses, pros and cons.
  53. Supplier reconciliation must be carried out effectively by businesses to manage its accounts payable and avoid any major impact on their cash flows. Know.
  54. Invoice discounting or business loans help enterprises in short term financing to meet any working capital deficit. Know more about these financing options.
  55. Bill discounting and bill purchase are often assumed to have the same meaning. This is a common misconception among business owners.
  56. Bill discounting and bill negotiation are methods used to release funds tied up in the invoices. But, both of them are carried out differently. Know more.
  57. Bill discounting is a simple process of selling the bill of exchange to the bank before its maturity at a price less than its actual price. Know more.
  58. Invoicing discounting is becoming quite popular for raising fast cash and freeing up blocked funds. Know the benefits of choosing invoice discounting.
  59. Invoice discounting is different when compared to invoice factoring, especially the risks involved for a seller and uses. Know more in this article.

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