Saturday, 2 November 2019

Invoice Discounting


When a company requests for a loan by keeping its unpaid account receivables as collateral, the process refers to invoice discounting. In this type of financing, the financer can alter the amount of the debt as soon as the amount of accounts receivables, kept as collateral, changes; hence the form of the loan offered is also short term.
Also considered as debtor finance, invoice discounting eyes to benefit companies having cash flow problems, as their debtors are expected to pay invoices not before 30 to 90 days. If a company is facing problems with their financial reserves being insufficient to pay corporate expenses, allowing clients to pay in 30-90 days can affect the cash flow of the business. With invoice discounting, instead of waiting for customers to pay within the normal credit terms, companies receive the cash as soon as the invoice is issued; thereby getting an accelerated cash flow from the customers.
Financer usually tend to offer loans of a smaller amount than the amount of the account receivable kept as collateral. Usually the amount is 80% of the total invoices, which are less than 90 days old. Through invoice discounting, the financier providing the short-term loan is benefitted from both the interest rates on the loan and a monthly charge for maintaining the arrangement.
With invoice discounting, the companies always have a power to retain control over its sales ledger and the payments are cased in the usual way. There are also direct payments from the clients and no third party is involved.
Invoice discounting can be beneficial for any company which provides product or service to clients and allows a credit term of 30-90 days. However, businesses which are mostly benefited with invoice discounting are:
        Construction
        Recruitment
        Manufacturing
        Wholesalers
        Printers
        Couriers
        Companies provide goods and services to customers and make an invoice
        Details of invoices are sent to the financer
        Financer provides the funds based on the amount of the invoices, usually within 48 hours
        Companies gets back the balance of the invoice once the debtor pays back

Advantages of invoice discounting:

        Companies can release up to 80 percent of outstanding invoices within 24 hours
        Invoice discounting is much simpler than other business loans
        No assets are put on risk
        Quicker and faster method to procure cash than applying for a Cash Credit
        Cash flow from the customer is considerably improved
        Business relations between the seller and buyer remain unaffected
        Companies get to choose to grow sales in terms of cash or credit
        Companies continues to get the control over sales receivables
        Financial agreement between companies and financers is not disclosed to buyers and confidentiality is maintained
        Companies’ power to negotiate over discounts enhances with seller’s invoice
        Financers provide companies with excellent business guidance


Disadvantages of invoice discounting

        Companies’ profit margin decreases as fee charged by the financer is an additional cost
        Financers allow borrowing only on commercial invoices
        Focus on strengthening credit norms for debtors can be affected with excessive usage of invoice discounting
        Invoice discounting can negatively affect the financial statements of new businesses
        Amount of loan extended is highly volatile

Key features of invoice discounting

        Perfect alternative solution for traditional business form
        Cash flow remains unaffected as instant cash is provided over cash tied up with unpaid invoices
        Adapts with the changing business environments as they change and grow
        Companies retain control on collection of payments

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