The Pros and Cons of Invoice Discounting

invoice finance has made it easier for small businesses worldwide to access credit. This credit facility empowers the business to use its unpaid invoices and meet working capital requirements. This invoice financing is mainly categorized into an invoice discounting and invoice factoring. The two categories may seem similar but have considerable differences in reality. 

Through this blog, we aim to help you understand what invoice discounting is and also some pros and cons of this service.

So, What Is Invoice Discounting?

It is a short-term financing option to enable businesses to use their unpaid invoices as collateral and avail of loans from a third-party lender. 

After a business raises invoices for products or services, the discounting company lends a certain percentage of the invoice amount. 

After receiving the full payment from the customer, the business must repay the loan and a stipulated fee amount to cover the interests, costs and risks.



The PROS OF FINANCE DISCOUNTING

  • It improves business cash flow & releases cash lump sum – Initially, when you use invoice discounting, you can release a large portion of the cash blocked in your unpaid sales invoices. 
  • Funding growth as your business grows- unlike traditional bank loan drafts, where funding is pre-stated, here, the more invoices you raise, the more funding you get.
  • You can avail protection against bad debts – you can get protection against bad debts (non-recourse invoice discounting) as an option in many companies. 
  • Confidentiality is a priority - if you want a confidential transaction, you can opt for a confidential service so that your customers remain unaware of using a discounting invoice facility. 
  • Control on customer contact - discounting lets you retain the credit control and invoice collection function in-house to let you remain in control regarding communication with your customers.

Cons Of Invoice Discounting

  • Cost – Well, no good thing comes free! There is a cost to using a discounting service. Having said that, you are free to roam around and find the best deal for your business. 

You can also offset the cost with improved cash flow meaning you can demand discounts from suppliers.

  • Minimum charges – some firms may charge a minimum monthly or annual fee for the services, and some may not charge anything and still allow you to collect your invoices.
  • Contract length – Most companies will need you to sign a contract for a set duration. Again, this is not the case with all firms, and you can peek around to find the one that suits you the best.
  • Security requirements – Sometimes, additional security requirements may become essential. Some companies might cooperate while others won't.
  • Manage your own sales ledger – Discounting, unlike factoring, doesn't provide a credit control function to aid you in collecting your unpaid sales invoices.  
  • Set up the process – This, again, is not valid for all firms, but some firms may have a lengthy and complicated setup process for discounting services. 

Bottomline

Irrespective of the option you choose for financing services, both categories require signatures to take possession of outstanding invoices.

In general, invoice discounting is riskier than factoring, but the monetary benefits of discounting over factoring make up for the risk factor.

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