Invoice discounting

Invoice discounting

Invoice discounting helps companies and business organisations to expand and grow.

Invoice discounting provides business a way to borrowing money against the amounts due from clients. It usually helps businesses to improve their cash flow, pay workers and suppliers, and even in reinvesting in operations as well as early growth. Borrower is supposed to pay a specific percentage of the invoice amount to the finance provider as a fee for borrowing the money. Invoice discounting is always seen as a problem solver when it comes to clients who takes a long time to pay back to the supplier.

Invoice discounting is one of the simplest forms of invoice financing. With the help of invoice discounting you can sell unpaid invoices to a lender and in return they will provide you with a cash advance which is usually a percentage of the invoice’s value. When your client has to pay for the invoice, the lender is supposed to pay you the remaining balance after the deduction of their fee.

Another way of understanding invoice discounting is that it can be seen as a series of short-term business finance which is availed using invoices as a security. In other words, the lender is known to the fact that you owe the money, so they lend you most of the amount of it before the customer actually pays you.

KEY TAKEAWAYS

●        Invoice discounting makes it possible for a business to use its unpaid invoices in the form of collateral for financing.

●        Business can use invoice discounting for improving cash flow for their operational needs as well as in speeding up expansion and investment plans.

●        Invoice discounting could be structured as per the needs so that the buyer is unaware that their invoice is financed or is managed by the lender and there is involvement of a third party.

Invoice Discounting Process

To better understand how the process works, let’s look at it step by step:

1.   A business raises an invoice to a debtor on a purchase made by the latter.

2.   The company sends the same invoice to a finance provider or bank.

3.   The bank then makes the advance cash payment to the borrower in as early as 24 hours. It only lends a certain percentage of the invoice amount.

4.   Once the amount from the debtor has been paid up in full, the finance provider releases the remaining amount from the invoice to the company. 

Invoice discounting example

 Darth has just started his Business and has contacted for discounting facility with The Invoice Company for helping with the cash flow, and Darth issues an invoice to his client worth $10,000 for the work he has already completed. Darth’s agreement which he had made with The Invoice Company states that the advance percentage is 75% which means Darth will be advanced $7,500 in advance by The Invoice Company as soon as an invoice will be raised.

Usually, Darth is supposed to upload the invoice on his online account with the finance provider and then further receives the advance.

Darth’s client settles up the invoice after a few weeks by paying $10,000 within a trust account which is controlled by the finance provider. Because of the confidential facilities, from the buyer’s point of view, it will look as if they are directly paying to Darth.

The Invoice Company will then have to pay Darth with the remaining $2,500, deducting their fees. The fees are usually around $250-300, so Darth will be receiving amount of between $2,250 and $2,200 as per this example.