The Win-Win Math of Invoice Discounting for Enterprises and Vendors

Invoice discounting is a flexible mode of financing in which an enterprise can access funds tied to unpaid invoices. This method improves cash flow by converting outstanding debtors into immediate working capital, thereby assisting the enterprise in paying its creditors early, removing payment delays, and investing in growth opportunities. This article will show how invoice discounting is win-win math for enterprises and vendors.

What is Invoice Discounting?

Invoice discounting is a flexible financing method that helps enterprises quickly access funds stuck in outstanding invoices. An enterprise needs to share outstanding invoices with banks or NBFCs, which can, after verification, provide almost 90% of the dues as loans to the enterprise within 1-3 days. Typically, these invoices must be issued to reputable corporations or government entities, depending on the terms laid out by the finance entity. 

Why It's a Win for Enterprises

1. Improved vendor relationships: Liquidity obtained from invoice discounting can be used to pay outstanding creditors before their due dates, thereby reducing days payable outstanding (DPO). This improves trust among suppliers, and the enterprise may also enjoy a hassle-free supply of goods and services and special discount offers.
2. Impact on Bottom Line: The early discount offered by the supplier due to prompt payment by the enterprise decreases the overall cost. Dependency on high-interest traditional modes of finance decreases with invoice discounting; accordingly, the enterprise's finance cost decreases, smartly improving working capital management. This enhances the enterprise's overall EBITDA. An enterprise can also visualise its annual savings by using Clear's invoice discounting platform.
3. Better Capital Allocation: Enterprises, especially MSMEs, can invest in growth opportunities without depending on traditional long-term loans, which require various documentation for approval.

- Why It's a Win for Vendors 

1. Credit Risk Reduction: Prompt or early payment received by the enterprise reduces credit risk and efforts in following up for payments. This improves the cash flow predictability for the vendors and trust with the enterprise.
2. Contract Terms: With payment received within the credit period, vendors may offer preferential rates or priority services to the enterprise, improving the bottom line and ensuring the supply of goods and services is undisturbed. 
3. Growth Opportunities: Vendors can comfortably plan investments in growth opportunities, as the cash flows are predictable, thereby reducing the need for a traditional high-interest loan.

- Visualising the Win-Win Math