Invoice discounting is a form of short-term borrowing which is extended by the bank or a lender to its customers based on unpaid invoices. It is often carried out to meet short-term liquidity needs of the company. The whole period could go on for as long as 90 days.
International data says that approx 66% of companies wait for over 60 days for payment and around 50% wait for more than 90 days. The obvious solution to late payment is invoice discounting.
What is invoice discounting used for?
Invoice discounting is used for day to day expenses and cash flows. It could help pay off small business loans, quick business loans, equipment financing, collateral-free loans or a working capital loan. It helps understand and shape a better flow in terms of clarity of what is flowing in and what is out of the business. You retain the complete aspect of everything related to cash flow.
How does invoice discounting help the business?
- The business gets the cash instantaneously giving business cycle a better momentum
- It allows an entrepreneur to do business without funds
- There is available cash for you to pay off loans.)
- Minimize bad debts and understand the early signs of it
- As your sales grow, increase the cash flow
Steps to invoice discounting
Invoice discounting is something which is provided by a lot of lenders. This implies that the money which is in flow will get to you instantly. This is irrespective of how long would it take the customer to actually pay up the invoice. This could also form collateral and collateral free loans.
Generally, lenders do not supply the amount which is directly equal to the value of the invoice. The percentage ranges from 75% to 90%. The customer pays up for the invoice; the remaining sum will be compensated. The interest rate at which the lenders to provide it varies from 1.5% to 3.0%.
A quick process is-
You take the invoice that was provided to your customer and take it to a discounter (for example – FlexiLoans) within 24 hours and they pay you a certain amount of money ranging from 75% to 90% of the invoice.
You are in control of all the sales management, cash inflow and the management of business and customers.
The remaining balance that is left on the invoice; you will receive it once the debt is collected by the company from the purchaser.
Examples of invoice discounting.
Mr. A provides an invoice to Mr. B of Rs. 10,000 and then Mr. A goes to FlexiLoans (Financial institution) and gets an invoice discounted upto 90%. He will then be paid Rs. 9,000 by FlexiLoans and the remaining amount stays outstanding till the customer re compensate the invoice, in the whole process; the 1000 Rs. is seen as invoice discounting.