How Does an Invoice Discounting Facility Work?

How Does an Invoice Discounting Facility Work?

At the beginning of 2020, the New Year’s resolution for many businesses was to thrive and grow their business exponentially. However, with the outbreak of Coronavirus, the business goals have changed. While the focus is on the global health crisis created by this outbreak, the massive financial impact on businesses cannot be ignored.

The lockdown brought almost all economic activities to a screeching haltaffecting the sales, supply chain, production, and invoice cycle of businesses. The impact of the pandemic is severe on the company’s balance sheet and ledger accounts. Amidst such a situation, the need for businesses to take the right step to generate the much-needed working capital while maintaining cash inflow, catering to customer needs, and focus on growth strategies is crucial.

With disrupted supply chains and social distancing norms in place, businesses are now unable to make payments or maintain good working capital. The invoicing cycle is also delayed by 40 to 60 days— further increasing the risk of defaulting on payments. Many businesses are in need of immediate funds to survive. 

How Can A cash-deprived Businesses Access Working Capital? 

Many businesses are already generating invoices swiftly, reducing their operating costs, focusing on customer service, and managing their inventory based on the supply and demand forecast. But, none of this will help them access the required working capital immediately. This is the right time for businesses to opt for alternative lending options such as invoice discounting as time is of the essence. This is one of the quickest ways to access short-term business loans which will help businesses not only sustain but also focus on expansion and growth strategies.

What Is Invoice Discounting?

Invoice discounting is alternate financing for businesses wherein businesspersons can sell their unpaid invoices to an investor or financial institution at a discounted price. As a form of working capital, this aids in the seamless e cash-flow of a business.

How Does An Invoice Discounting Facility Work?

Unpaid invoices can be leveraged by businesses for a short-term loan that generally needs to be paid back within 30–90 days. This quick access to working capital can help businesses stabilise growth, maintain operations, and pay off salaries, etc. The flexible nature and quick access of this type of working capital make it an apt choice for businesses as opposed to other forms of financing such as overdraft facility, traditional business loans, etc.

The Process of Invoice Discounting

KredX— India’s leading invoice discounting platform allows businesses to trade their unpaid invoices digitally on their website. The invoice discounting process is simple, quick, and transparent. The steps are as follows: 

  1. When a sale is made, the business generates an invoice (usually payable after the credit period).
  2. Business uploads the unpaid invoice digitally on the KRedX website.
  3. Investors in the KredX platform will purchase the invoice at a discounted rate.
  4. Within 24 to 72 Hrs* the invoice value offered by the investor and agreed by the business will be transferred to the business account. 
  5. The business receives the working capital required to fuel the business.

Advantages Of Invoice Discounting Facility

  • Accelerates Cash Flow– Businesses benefit from the quick access to the working capital which in turn helps them stabilise growth and pay their operating expenses.
  • Collateral-free– Getting hold of capital doesn’t require you to own any high-value assets. The invoice itself acts as collateral. Therefore, this is one of the most preferred types of short-term financial assistance by businessmen.
  • Apt for rejected companies– It is an ideal option for companies that have been rejected by traditional financial institutions.
  • Doesn’t Affect The Balance Sheet– This type of financing doesn’t impact the balance sheet and doesn’t appear as debt.
  • Provision of more funds– This method of business financing can sometimes help provide more cash inflow than a traditional business loan.

When Is It Suitable To Opt For Invoice Financing?

  • When you work with big customers who are valuable to your business but insist on longer credit terms. Turning away these customers may have a great financial impact on your business. In this case, invoice financing will help you maintain a healthy relationship with your clients.
  • When you have a short-term cash inflow crisis and your suppliers are demanding a large down payment for your order or if you have high operating expenses that need immediate working capital.
  • When your business has high-profit margins, making it easier to cope with higher interest rates.
  • When you have an established business and have an effective credit control system.
  • Your history with customer disputes is impeccable.
  • Your turnover transcends the threshold required by the lender.

Difference Between Invoice Discounting and Invoice Factoring

The imperative difference between the two is that with invoice factoring the lender has control of the company’s accounts, collecting invoices, and following up on late payments. Whereas, the business itself is responsible for collecting payments from the customer in case of invoice discounting. Therefore, if a business wishes to retain control of their accounting books and manage their clients, it would make sense to choose the latter form of financing.

Conclusion

If you are a business owner perturbed about the impact of the pandemic on your business, you are not alone. Several businesses are on the same journey with you and many have unlocked the benefits of invoice discounting. Be the next business to use the power of invoice discounting and fuel your business’s growth. Get in touch with KredX for more information. One of our experts will help you regain the financial strength of your business.