Small businesses find it difficult to manage their invoicing cycles, resulting in unfavourable working capital. Invoice discounting enables business owners to receive quick business loans by offering cleared invoices as collateral.
Invoice discounting is a process through which a business can leverage its accounts receivables for availing financing for short-term requirements. While invoice discounting is becoming quite popular for raising fast cash, it’s good to know the benefits of invoice discounting before you look to borrow credit.
Advantages of Invoice Discounting
- Fast Cash Infusion – The apparent advantage of invoice discounting is that it lets businesses raise cash quickly to exploit new business opportunities. Hard cash is available to the merchant as soon as the invoices are issued, which can be used to boost sales, repay debt, reinvest in the business, or expand the business.
- Free Locked-up Funds: Invoice discounting assists businesses in releasing funds locked up in customer invoices for a prolonged period. It’s beneficial in cases where the seller’s obligations and duties have been fulfilled ahead of time, but the invoice payment is due as per the agreed schedule.
- No Collateral – Invoice discounting provides unsecured business loans instead of customer invoices. Hence, there’s no risk to a business’s movable assets.
- Reduced Collection Period – Unlike other trade loans, invoice financing is quicker to receive business loans. Thus, a business could receive the funds without waiting for the entire credit period against a nominal fee.
- Increases Credit Sales: This mode of invoice financing can help churn credit sales to cash, support faster growth, and exploit new opportunities, particularly for small and mid-sized enterprises.
- No Bad Debts – A business can obtain a ‘non-recourse invoice discounting’, where a lender accepts complete responsibility for all of the merchant’s invoices that remain unpaid. In brief, it implies that the business would continue to receive the whole amount due to the business minus the lender’s fee.
- Faster Business Repayments – As invoice discounting improves cash flows, this allows a business to settle its repayment obligations quicker, whether debt repayments or the business’s invoices. By paying off its invoices and debts faster, a business might obtain discounts for early repayment.
Invoice discounting enables businesses to streamline their cash flows and maintain favourable working capital. It’s not a substitute for capital loans. Hence, funds from invoice discounting should be employed for working capital and short-term growth objectives instead of capital investment and asset development.
Invoice discounting is essentially a mode of financing followed to ensure the extensive use of the company’s due amounts. Invoice discounting can help businesses manage their cash flows more proficiently if done well.