Bill Discounting as a Smarter Alternative for Working Capital Lenders

Working capital is an important component of overall corporate stability and growth. Working capital can be defined as the difference between current assets and current liabilities. Current assets include cash, inventories, and short-term receivables, and current liabilities refer to those due within a year or less. This means it is relevant in meeting short-term obligations and also in exploiting business opportunities. If current assets are higher than the current liabilities, it simply means that it has an adequate working capital position. Working capital describes a condition of financial fuel required in the running of business activities, which sustains operations by meeting obligations and enabling the capturing of growth opportunities.

Slow-paying customers and extended credit terms can put tremendous pressure on working capital, though. Companies in these situations often turn to working capital lenders to fill the gap. While the latter offers an accessible source of liquidity for some business owners, the associated constraints limit the possibilities.

Working Capital Lenders: A Traditional Approach with Limitations

Most conventional working capital lenders, such as Banks and other financial institutes, offer several loans to better present short-term cash flow. The loans are further divided mainly into the categories of secured or unsecured, depending on the lender’s need and the borrower’s creditworthiness. As much as working capital lenders provide this solution to the borrower, they are not immune to redraws:

Lengthy Application Process: Receiving a working capital lenders

The application process is usually long and cumbersome; working capital lenders tend to require comprehensive financial statements and business plans or projections, which can be onerous for businesses with immediate cash flow needs.

Reliance on creditworthiness: Most of the qualification to most working capital lenders is based on the credit history of the borrower. Therefore, businesses with a credit history that is limited, blemishes from their recent financials, or a complete lack of established financials can really struggle to qualify for good terms.

Debt Obligations: Working capital lenders will definitely add to the increased debt liabilities of a company. Such loans usually carry fixed or floating interest rates, adding to the cost of borrowing. The increase in repayment tenor is also stretched till years, which might affect the financial flexibility of the firm in the long term as well. 

Invoice Discounting: Quick and Simple Solution

This form of invoice discounting, for example, gives an excellent option to traditional working capital lenders. Under this particular form of arrangement, the business sells its invoices that have not yet been paid for at a discounted rate to a financial institution, such as KredX. The financing cost in the context of immediate cash flow compared to waiting for the payment by the customer is the discount fee. Boosting working capital through invoice discounting

Invoice discounting gives businesses a very effective tool to optimise working capital where the payee faces the following major constraints:

While it offers the fundamental advantages of cash access faster, lessening reliance on credit, and predictability of cash flow—greater details of which one has already talked about in detail subsequently—Invoice Discounting unwraps several more utilities that help businesses thrive, truly leveraging its capability to transcend the role of any working capital lender. Here is how invoice discounting acts as a working capital booster with a difference:

Better Supplier Relationships: An invoice discounting facility avails your outstanding invoices for instant payment, and as such, you are in a good position to negotiate payment terms with suppliers. This is because when you know, you will receive instant cash as and when needed, you are able to take the opportunity to get a discount on the many discounts your suppliers offer for early payment. These discounts could result in big cost savings, which will lead to additional profit and improved working capital efficiency. On a related note, prompt payments facilitated by invoice discounting may also enable you to build better, more trusted relationships with your suppliers. This can, in turn, facilitate terms of supply that are more favourable compared to destroying such relations due to undue dependence on working capital lenders and delayed payments.

Improved Inventory Management: Indirectly, invoice discounting betters your inventory management. Having ready cash flow from discounted invoices means that you have increased leverage power to purchase better from your key suppliers. This builds the optimum levels of inventory and minimises the risk of stock shortages or overstocking, both of which can negatively impact working capital. Benefits of bInvoice Discounting Unlike working capital lenders, bInvoice discounting considers your needs for inventory management, which assures that you can continue to make the proper purchasing decisions around real-time cash flow.  Release Hidden Capital: The invoices that are not paid clearly indicate the invisible capital lying locked up in your business. With invoice discounting, you can turn this hidden potential into working cash flow. Examples include companies with slow-paying customers or very long-tail payment cycles. You can actually use this available capital, which is commonly syphoned off by bill discounting, for initiatives that drive growth, respond to an unexpected opportunity, or even just for a healthy cash flow buffer during your slow cycles. Traditional working capital lenders may not give full value to your outstanding invoices, which limits your factoring availability.

Amount flexibility: Unlike working capital loans, which will come with fixed amounts, it is possible to have flexibility in the amount of money one can borrow from invoice discounting. You can select any single invoice, a set of specific invoices, or, indeed, all accounts receivables outstanding at one time. This puts you in a position to finance your business based on the needs dictated by your cash flow. Working capital lenders might have a minimum amount one can borrow, and this may not always meet your specific short-term needs. Therefore, one might be forced to borrow more than what one needs, incurring interest charges on the surplus.

Reduced dependence on external debt: Bill discounting is not an age-old method of lending by working capital lenders. You pay a one-time discount fee for early access to cash, avoiding the accrual of interest charges and long-term debt obligations. This could be highly beneficial for those businesses that are careful about their overall increasing debt burden and want to rely on a more controllable approach to finance working capital needs. In addition, the effective rate of interest under bill discounting is likely to be lower than working capital lenders, making you financially strong.

At the end of the day, while discounting a bill, a strategic and multifarious perspective regarding working capital management will be available to businesses, enabling them to enhance their capacity beyond the scope of working capital from a traditional lender. Bill discounting, by leveraging of the outstanding invoices in combination with proactive management of cash flow, releases hitherto blocked capital that helps in improving supplier relationships and also helps surmounting financial barriers, a clear route towards firm growth, improved profitability, and competitive advantage in the marketplace.

Faster access to cash >> Turn your outstanding invoices into immediate cash in-flow in less time than it takes to get a working capital loan.

Minimal dependency on credit >> Funded by the creditworthiness of your customers, not yours.

More predictable cash flow: Put you back in control of your finances to better plan for your future.

Simple process: Minimal documentation and quick online application process for availing funding quickly.

Scalability: Financing solution that will grow with your ever-growing needs

At KredX, we believe in your success. Our team of experts will work closely with you to learn your requirements in order to design a bill discounting plan that will fuel your growth.

There is no more time to be wasted! Call or write to KredX today and make a bill discounting the real game-changer in your business going forward. Feel the power by unlocking your hidden capital and optimising your working capital management.