A Complete Guide To Bill/Invoice Discounting

In businesses, it’s quite common that the customers delay the payment but for the seller, without the working capital, it’s difficult to take the next order. Also, the possibility of losing the customer is much higher if they constantly pester the customer to make the payment soon.

To overcome this, smart businessmen opt for bill or invoice discounting, which is kind of prepayment of dues against the money that is expected to come in near future. Let’s understand this in more detail.

Sales Bill/Invoice Discounting

Invoice discounting also known as ‘receivables financing’ is the short term loan in which businesses or individuals borrow money from lenders in advance and in lieu of payments due from customers. Companies have to pay a percentage of the total payment to the lender as a fee for borrowing the money.
 

Uses of invoice discounting

1. Improved Cash flow: For most SMEs, payments from existing customers help them to start working on the next set of orders. But when payment gets delayed, SMEs face trouble as they can’t pressurize the existing customers to pay or else they might lose them, but also can’t forgo newer assignments. In such a scenario, invoice discounting services help small businesses improve cash flow by giving them the capital quickly. Usually, up to 80% of the advance invoice amount (receivable) can be converted into cash.

2. No need to incur debt: Since the company is only paying a share from its profit, there is little chance of incurring huge losses or meeting those losses by borrowing money from banks. The businessman can simply get cash by releasing the funds locked in the form of unpaid bills.

3. Quick access to cash: The process is faster than other loan options, as invoice discounting provides liquid cash to companies as soon as an invoice is issued. It accelerates cash inflow, helping the borrower spend money on the next project or for business expansion or for repaying outstanding dues, etc.

4. Reduced collection period: The whole time taken from the delivery of the good or services to generating the bill and then waiting for the payment and then payment to come out as liquid cash is way too long. Invoice Discounting reduces this collection period. To reiterate, the blocked funds are converted into cash and that too without waiting for the entire credit period.

5. No collateral required: In most of the cases, no asset (movable or immovable) needs to be put on the line as collateral in discounting process. Only the fee that is deducted from the actual invoice payable is the cost the applicant has to let go.

6. Business to sell goods on credit: Selling goods on credit means that the customer owes the supplier of goods and services, some money. If customers prefer credit payment, companies can grow their sales if they opt for invoice discounting as they now don’t have to wait for the actual cash payment. The discounting agency will pay them. So, they can allow their next customer the same privilege of taking time to pay the amount.
    

The process of Bill/Invoice Discounting

• Trading of goods and services – The first phase involves the borrower or the small business offering goods or services to the vendors or customers.

• Raising invoice – The borrower then raise invoices for the payments he expects the customers or vendors to pay within 90 days.

• Discounting of bill – Borrower then approaches the financial institution to get the bills discounted, or to get a loan against the invoices raised. The bill is discounted after deducting a small fee.

• Collection – In this stage, the customers or vendors pay the borrower as per the invoice raised by due date. This way the borrower can repays the loan.
   

Purchase Invoice Discounting

Terms like ‘invoice discounting’, ‘bills discounting’ and ‘purchase of bills’ are usually overlapping terms. But Purchase Invoice Discounting is slightly different. It is a short term financing where payment is made to the company by a financial institution so that the company can purchase goods. The financial institution gets the money back from the borrower at the end of the discounting cycle.
 

Uses of purchase invoice discounting:

1. Quick method for purchase of goods – Purchase invoice discounting can help a borrower (a small business) purchase new inventory or goods that can help meet a new order. This discounting ensures positive cash flow, so that the business doesn’t lose out on a new project, just because they don’t have the money to buy goods to meet that project’s needs.

2. Meets the needs instantly – With purchase invoice discounting, a small business doesn’t have to go through the entire loan application process to meet the immediate needs. Invoice discounting gives the borrower or business liquid cash with which he can instantly buy new inventory to meet the demands of his new customer.

3. Easy to apply – It is very easy to apply for purchase invoice discounting as the borrower is taking a loan against the purchase order he has raised towards his suppliers or vendors,. As soon as the purchase order is received, the financial institution after checking the eligibility norms disburses the required amount to the borrower’s account.
    

Eligibility for Bill Discounting

• Both the contract and the payment must have a written record, endorsed by both the parties (the company and the customer)

• A purchase order, in response to the sales order, must be raised by the concerned customer

• Raising of invoice by the customer for which the payment is pending

• Fixed date for the outstanding payment as promised by the customer
   

Summation and Conclusion

Be it invoice discounting or purchase invoice discounting, they are simply great ways of running your business without ruining your business relations. These short-term loans help in keeping the business ball rolling with immediate funding. Above all, it creates a win-win situation for all the parties involved - the company, the company’s customer, suppliers and financial institutions engaged in the discounting business.