What is invoice discounting?
If you’re looking to grow your business and keep it financially stable, then you might want to take a chance at invoice discounting. Invoice discounting is a method that allows you to borrow money against cash that is owed to you by your company’s clientele. Say your company needs money, but your clients have yet to cough up the cash that they owe you; the amount your clients owe you can all be summed up and a percentage can be given to you by a lender as a form of financial relief. Simply put, it is a sale of receivables. It also can help with commercial finance.
When is the right time to make use of it?
Fact is it takes a long time for clients to pay back the money they owe you. It may take a couple of weeks, or it may take more than a month. And the time between sending out an invoice and receiving what is due is a crucial moment for a business. Your business has its own financial responsibilities, and these may come knocking during the said time frame, causing you to have a dilemma regarding cash flow. If you anticipate this kind of problem and if you think you can handle an invoice discounting arrangement, then it will definitely be of big use to you.
How do you go about it?
Like any type of loan, you would have to go through the necessary application process. For you to be approved for an invoice discounting arrangement, you will need to prove that your company is profitable and has audited accounts. It is also important to emphasize that you have a sound credit control system. You can approach lenders, such as an invoice discounting facility, who can agree to give you that much needed percentage. Usually, they give you around 70% to 90% (a full value equivalent) and are able to give you the advance as soon as invoices are raised. With invoice discounting you could have the money immediately as lenders don’t normally look at how long your clients will be able to render their payments.
How much does it cost?
Since it’s an advance, you also need to pay back the amount you had received. Interest rates are usually from 1.5% to 3.0%, and lenders also require you to pay a management fee of between 0.2% and 0.5%. Because of this, your profits won’t be as high as you expect, but at least your company doesn’t have to struggle. You can choose a lender that will best suit your company’s needs, as well as ones with fees that won’t affect your company significantly. Invoice discounting is a step in the right direction.