Invoice Discounting

Invoice Discounting

Intro

Financial service that helps companies get access to cash-flow tied up in unpaid invoices. Particularly useful for SMEs that need to manage working capital needs while waiting for clients to pay their dues.

How does it work?

1. Issue Invoices: A business provides goods or services to its customers and raises invoices for the same.
2. Sell Invoices to a Financier: Instead of waiting for customers to pay, the business sells these invoices to a financier (usually a bank or a financial institution) at a discounted rate.
3. Immediate Cash Flow: The financier pays a percentage of the invoice value upfront, typically around 70-90%.
4. Customer Payment: Once the customer pays the invoice in full, the financier releases the remaining amount to the business after deducting fees and interest.

Benefits of Invoice Discounting for Businesses

1. Can access working capital immediately without waiting for the payment cycle to end.
2. Unlike traditional loans, invoice discounting doesn’t require fixed assets as collateral; the invoices themselves act as security.
3. Unlike factoring, the business retains control over customer relationships, as customers are often unaware of the arrangement.
4. Businesses can choose which invoices to discount, making it a customizable solution.

Challenges

1. Discounting fees and interest rates can be relatively high.
2. Financiers evaluate the creditworthiness of the business and its customers, which can limit eligibility.
3. Businesses relying heavily on this model may face challenges if their sales cycle slows down.

Who Should Use Invoice Discounting?

• Ideal for businesses with a steady flow of invoices and reliable customers.
• Can include companies in industries like manufacturing, logistics, and professional services.