Need Cash Flow? How Invoice Discounting Can Boost Your Working Capital

The dynamic nature of business sometimes allows ‘moments’. Maintaining healthy working capital enables a business to take advantage of these fleeting moments in time by giving it the financial agility to invest in promising ventures and bridge temporary gaps in cash flow. This enables businesses to take calculated risks, which can be the drivers for business growth. On the other hand, limited working capital may constrain a business to a reactive stance, preventing it from responding with speed and decisiveness to emerging opportunities.

Though there are significant advantages of working capital loans, there are also their inherent limitations. Working capital loans are borrowed money that is easily available from any bank or financial institution to fight a crisis in one’s short-term cash flow. Depending on the criterion of the lender and the borrower’s credit score, working capital loans may be secured or unsecured. Though working capital loans sound quite helpful in a tight financial situation, they are not always appropriate for every business because:

Cost of Borrowing: Interest rates can be high for working capital loans, more so for those that are unsecured. This can impact profitability if used unwisely.

Repayment Terms: Working capital loan tenors may not easily align with the cash flow cycle of every business, thereby setting up periods of stress during the repayment of such loans.

Collateral Requirements: In the case of secured working capital loans, businesses are required to provide collateral that can consequently restrict additional credit availability and create an asset risk for the company.

Creditworthiness: Terms for and availability of many working capital loans are dependent upon the creditworthiness of the borrower, and this therefore may exclude those businesses that have weaker credit profiles.

Lengthy Application Process: One can definitely get stressed about the length and hectic work associated with the application process for a working capital loan. In most cases, financial institutions require detailed financial statements, business plans, and projections—which can all be pretty time-consuming to prepare, especially if the immediate need is for a business facing a cash flow.

Dependence on creditworthiness: The qualification for a working capital loan is strongly dependent on the credit history of the borrower. Businesses that have thin credit files, recent financial blemishes, or lack established financials may find it hard to qualify for good terms or be flatly rejected.

Debt Obligations: Working capital loans add to your overall debt burden. Working capital loans generally carry fixed or variable interest rates, which further increases your borrowing cost. Apart from that, the tenures for repayment may extend into several years; thus, financial flexibility, over the long run, may be reduced. 

Invoice Discounting:- Source a Leaner Way of Working Capital Management

Invoice discounting or, simply, invoice discounting, is a really attractive view against traditional Working Capital Loans. A business sells its outstanding invoices at a discount to a financier. The discount fee is for the cost of financing to get immediate cash flow instead of waiting on the customer’s payment.

Bill Discounting as Booster of Working Capital

Bill Discounting is an effective way for any business house to achieve the perfect working capital and to come out of the limitations of a working capital loan:

Faster Access to Cash: Invoice discounting helps outstanding invoices get turned into instant cash flow. Unlike the elongated process for approval of a working capital loan, invoice discounting helps to access cash in a very short time period. This could be vital to businesses that suffer from short-term cash flow shortages or need to come up with funds in order to grab an opportunity presented in a very short timeline.

Minimum Credit Criteria: To use invoice discounting, there is little reliance on the overall credit history of the borrower. The two most central factors to be considered here would be the creditworthiness of the receiver of the invoice and the overall quality of the accounts receivables outstanding. In that case, bill discounting will work quite well for businesses with less credit experience or those with a poor credit history that is not otherwise suitable for optimum terms on working capital loans.

Greater Cash Flow Predictability: Invoice discounting allows you to know exactly when your money is coming in by transforming outstanding invoices into immediate cash flow. This kind of predictability will help in taking better control over working capital and thus planning and preparing your finances better for possible future expenses, investment, or operational needs than you would have been able to with reliance on customer payment timing.

Less dependency on debt: While working capital loans add to your overall debt burden, invoice discounting is, in fact, not a traditional kind of debt financing. You pay a one-time discount fee for the access to earlier cash and avoid accumulated interest charges and long-term debt obligations. Particularly, it’s interesting for businesses that are very sensitive to increasing their overall level of debt and want more control over how to finance their working capital needs.

Improved Supplier Relationships: Getting instant payment against your invoices through Invoice Discounting may help you to negotiate better payment terms with your suppliers. This is because knowing you have access to immediate cash flow allows you to take advantage of the early payment discounts offered by suppliers. These discounts could be quite cost-effective and enhance your overall profitability and working capital efficiency.

Better Inventory Management: Bill discounting can also indirectly enhance your inventory management practices. With readily available cash flows from discounted invoices, you may be better placed to increase your purchasing power and negotiate better deals with suppliers. You get better control of the level of inventory, thus reducing the constant risk of either facing stock-outs or overstocking since both situations lower the working capital for any firm.

Focus on Core Business Activities: Due to the least possible time and documentation required for the application process, bill discounting aids in keeping more valuable time and resources for your business. Unlike working capital loans, which may involve a long-time tussle with the lender, bill discounting helps you keep your team focused on core business activities such as sales, marketing, management, and development of products etc.

Scalability for growth: Invoice discounting is itself an extremely scalable financing solution that can grow with your business. If the sales have increased and more invoices are issued, bill discounting allows you to draw from a larger source of working capital, thus helping you in supporting your growth initiatives without being restricted by limitations from fixed-sum working capital loans. You can discount a single invoice, a selected number of invoices, or the entire outstanding accounts receivables portfolio. Your working capital is accessible according to your needs.

Optimisation of Working Capital Loan with KredX Bill Discounting

Are you ready to unleash the power of your outstanding invoices and explore a world which is all about bill discounting? KredX presents fast, competitive, and quality-driven bill discounting services. We help you transform unbilled invoices into cash flow within the twinkling of an eye, hence empowering you with optimised working capital to confidently exploit the emerging opportunities and navigate any financial challenge.

What are you waiting for? Reach out to KredX today and learn how bill discounting can be the magic your business needs to thrive in today’s highly competitive landscape!