Invoice discounting also called Bill Discounting is a way in which a company can borrow short term funds from banks or financial institutions based on their outstanding invoices. Invoice Discounting is a manner in which businesses can raise short-term funds to meet short-term liquidity needs. Invoice Discounting is an alternative to a business loan or an overdraft facility. Under Invoice Discounting, the company provides the unpaid bills to the banks or financial institutions and in return, receives funds up to 90% of the outstanding bill value. It helps keep cash inflow from customers constant and they can pay within their normal credit period.
Documents required for Invoice Discounting
Here is a list of documents required for Invoice Discounting:
- Pan Card
- Aadhar Card
- Address Proof of Business and Entrepreneur
- Business Registration Proof
- GST registration certificate
- Filed GST Returns
- Ledger of Debtors
- Nine months bank statement
- Audited financial statements of the business
Types of Invoice Discounting
When it comes to invoice discounting, there are a few types that you can choose to maintain a steady flow of working capital.
Whole turnover invoice discounting
With this type of funding against an invoice, every invoice that a business generates across the turnover is discounted to raise funds, irrespective of the needs of the said business.
Confidential invoice discounting
Like its name suggests, with this type of financing, the entire process is carried out in confidentiality. It means that suppliers or customers of a company are unaware of the business raising capital against invoices before payment is received.
Selective invoice discounting
Spot factoring or selective invoice discounting are some of the examples where single receivable invoices are sold to third parties to raise capital.
These are the three principal types of invoice discounting which help companies acquire working capital for their businesses without hassle.
Factors on which Invoice Discounting depends
- Your business financial requirement
- Your monthly turnover for your business
- Your business visibility
- Active clients in your business
- Invoices outstanding amount
Features of Loan against Invoice India
- Bill Discounting is an invoice business loan.
- It helps small businesses to obtain funds almost immediately based on invoices which are already present as collateral.
- The invoice can be sold at up to 90% of the invoice value to the discounting agency and cash can be obtained.
How does Invoice Discounting work?
Invoice discounting is one of the most popular methods for arranging working capital for business. Under invoice discounting facility, the invoice raised for the customer is sold to the bank or financial institution at a discounted price. This implies that the money that the business would receive at the end of the credit period is collected instantly. Generally, all lenders offer this facility at a predetermined percentage of the invoice value, which varies anywhere between 75% – 90% and the rate at which the invoice discounting facility is available varies between 1.5% – 3.00%. Here is how Invoice Discounting works:
- Entrepreneur sells his commodities to the customer and raises a bill or invoice depicting the particulars of the sale, i.e. date of sale, number of products sold, payment due date, etc. As the transaction is a credit transaction, the time taken by the customer to make payment can be delayed till the due date, while the entrepreneur or seller will expect immediate payments.
- Therefore, to retrieve the lockdown funds, the entrepreneur can reach out to banks or financial institutions for invoice discounting facility
- The bank or financial institution upon their due diligence shall pay to the entrepreneur as per the predetermined percentage, kindly note, this amount shall be less than the invoice amount. The difference between the actual invoice amount and amount paid by the bank is called the ‘Discounting Fees’ and is taken by the banks or financial institutions.
- Later, when the customers pay back to the entrepreneur, they can repay the amount to the bank.
Methods of Invoice Discounting
Invoice Discounting can be availed in two ways, namely:
- Invoice Discounting with Recourse: Under this method, the banks or financial institutions carry out document verification of the entrepreneur or business and send it to the seller’s bank. In case of default, the entrepreneur or business is liable for the bad-debts
- Invoice Discounting without Recourse: Under this method, the banks or financial institutions do not carry any document verification. Additionally, in the case of bad-debts the liability to collect lies with the banker or lender.
Advantages of Invoice Discounting
- Increase in cash flow
Business owners can release a lump-sum amount otherwise tied up in unpaid sales invoices, and increase the cash flow. This method of availing capital works best for businesses which have a smaller number of clients generating high invoice values. It is mainly because for such businesses, a single unpaid invoice can keep a substantial capital tied up.
- Instant availability of financing
With this method, you can avail financing within 72 hours of applying. Thus, the capital is available instantly, much faster than other methods of traditional financing options.
- Confidential transactions
You may not inform your customers when you opt for this method of financing, allowing you to carry out the transaction confidentially. It puts a business’s concerns of losing customer confidence to rest.
- Increased funding with business growth
Unlike other business loans and overdraft facilities where funding is available only up to the stated amount, you can avail a higher amount with invoice discounting if you generate high-value invoices. Thus, with the growth in your business, you can avail increased funding against such invoices.
- Protection against bad debts
When you avail invoice discounting for your business, few financers offer protection against bad debt for your business. This protection comes to force if a customer turns insolvent and fails to pay against the invoice.
While these are some of the advantages, you must also be aware of a few of the drawbacks of opting for this facility.
Disadvantages of Invoice Discounting
It might be difficult for smaller companies to obtain credits through invoice discounting. However, businesses may be able to do away with this disadvantage if they can establish a steady track record, and instil confidence among financiers.
Invoice financing only offers partial or full funding for current accounts receivables and thus may not be adequate if a business is seeking a particular amount of business loan.
- Associated costs
Sometimes associated charges for utilising invoice discounting can be quite high. You can, however, address this shortcoming by looking for financiers offering the best deals with the proposition.