Improve Cash Flows With Bill Or Invoice Discounting

Have you every been in a situation where your payments for one order are delayed but the expenses for another orders continue to happen? Any trader worth his salt would have faced this because most markets work on credit cycle based payments instead of immediate payment. This problem however, can be easily solved by using bill or invoice discounting.

The simplest way to look at Bill or Invoice Discounting is to view it as a loan against payments receivable. Usually loans require some kind of asset as a guarantee, invoice discounting works on the basis of invoices. In simple words, you say "Here is the bill that says I will receive payment in a given number of days. In the meantime however, I require some capital", and the intermediary takes care of the rest (at a certain interest, of course!).

Nowadays, most entrepreneurs prefer to use bill discounting if their company is experiencing financial difficulties because of late payments or other business uncertainties. It is one of the most effective methods for increasing your business cash flow. The following article will go over the characteristics of invoice financing and its significance in business. But first, let us explain why having a positive cash flow is so crucial.

Why is positive cash flow important for your business?

Cash flow reflects your company's liquidity position. A positive cash flow indicates that your company's liquid assets are increasing. If you have a steady cash flow, you can easily reinvest your business profits in previously overlooked business opportunities, easily settle your debts, declare dividend income for shareholders, and so on. Simply put, a steady cash flow puts you in a position to deal with any opportunities and uncertainties that may arise in your business.
 
Also Read: Ensure Positive Cash Flows for Your Business with Supply Chain Finance

Why choose invoice discounting?

1. Easy access: 

   The procedure works in two steps: you show the bills and you get the money. For people who need capital in a matter of hours, this system works great. NBFCs are usually quicker in disbursing these loans.
    

2. No collateral: 

   Like we mentioned, there are no assets you need to submit as collateral. Your invoices are your word, and they are good enough to warrant a loan. It saves you from putting your assets on the line of risk if the deal goes bad, and protects you from bankruptcy. However, the reputation of the company which is responsible for making payment against those invoices will affect the rate of interest or in this discounting fee being charged.

3. Fast processing: 

   Bill or Invoice Discounting is usually done on an ongoing basis, and since the machinery is already in place, it makes it very easy for traders and businessmen to use this type of financing.

4. Improved efficiency:

   Invoice discounting avails you funds with minimal waiting time and paperwork, while maintaining the confidentiality of the arrangement. In other words, you always have the capital readily available without wasting any time and efforts, and without putting any assets on the line of risk. In the world of finance, this is how you define “efficiency”.

Also Read: Why invoice discounting is great way to improve cash flow for SMEs

How can bill or invoice discounting help your business?

1. Healthy cash flow: 

   A lot of invoices with pending payments effectively translate into a lot of paper but no actual money. Invoice discounting changes that by converting most of your invoices into cash. In that way, you do not need extra funds as an insurance against bad debts, and instead invest them into your business.

2. Increased business growth: 

   To run a business, you need capital. Easy availability of cash ensures that your operations are never disrupted and you can even expand your business without the worry of shortage of funds. Furthermore, a longer time-period to make payments might encourage customers to trust you more.

3. Hassle free invoice management: 

   Invoice discounting achieves two goals, it ensures quick loans for you, but also makes sure that your invoices are updated, managed, and organized. Proper invoice management will help you in the long run, especially while paying taxes.

4. Greater flexibility: 

   Invoice discounting enables a steady flow of capital, as and when needed. In some cases, there is also protection against bad debt. These factors collectively provide greater flexibility to your business, as you no longer need to rely on customers for working capital requirements.

Eligibility and Documentation

• 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
• The goods/ services pertaining to the order must be successfully delivered to the customer
• An invoice is raised and approved by the customer, but the payment is pending
• There must be a fixed date for the outstanding payment as promised by the customer

Other Ways to Increase Cash Flow 

If you are looking for alternatives to bill discounting to help you with organising the flow of money in your business, here are some pointers to help you:

• Avoid immediately settling payments for your creditors and suppliers after procuring raw materials from them. It is better to seek better repayment terms from them and invest the funds in areas that can increase your revenue quickly.

• If you are in the manufacturing business, you may have many plants and machinery that are no longer useful in the production or manufacturing process. Selling such assets as quickly as possible will improve your business’ cash flow.

• You may announce some incentives in the form of heavy discounts to drive sales and target new customers to improve revenue and increase cash flow. Furthermore, if a buyer fails to pay on time, you can impose a penalty in the form of an interest.

• Reduce non-essential expenses that do not help increase your business’ revenue. For example, blocking your funds to stockpile items that will be needed only in the next four to five months is not a good idea.

• Most of the time, you should consider leasing office space and machinery for your business operations. The value of the plant and machinery depreciates over time, while they become obsolete and unable to meet your evolving needs. Thus, it is best to keep your cash flow intact by renting these items instead of buying them. 

Conclusion

Invoice or bill discounting is one of the most convenient options for business owners to expand their wings. Invoice discounting provides you the capital immediately, when you need it, with hardly any questions asked. All of this possible, simply by the invoices you raise after every receiving an order. So when will you start using this this financial instrument?
 
Disclaimer: This post was first published on 27th February 2018 and has been updated for the latest information, freshness, and accuracy.