The Role of Bill Discounting in Securing Working Capital Business Loans for Logistics Companies

The logistics industry is the backbone of global trade. It ensures goods move from manufacturers to consumers efficiently. According to the latest Statista report, we get some impressive statistics. As per the report, global logistics industry was worth 8.4 trillion euros in 2021 and is anticipated to reach 13.7 billion euros by 2027. In 2020, worldwide logistics revenue reached $9 trillion. That equals 10.7% of the 85.24 trillion U.S. dollar world GDP that year. 

In India too this sector has seen fast growth that is driven by the e-commerce boom and the country’s improved infrastructure. In 2022, the Indian logistics market was worth $274 billion. This market was projected to reach $563 billion by 2030, growing 9.4% annually. Moreover, India has a logistics cost of 14% of GDP, way more than the BRICS average of 11%.

Yet this growth brings its own set of problems-particularly in cash flow management. Working capital becomes all the more crucial for logistic companies to get their operations running, get customers’ requirements fulfilled, and make investments for future growth. One efficient way to ensure this is through bill discounting.

Financial Strain on Logistics Companies

Most logistics firms often have a difficult time financially when clients are not paying promptly. Though business owners have to incur costs such as fuel, vehicle maintenance, and wages, many times they have to wait for 30, 60, or even 90 days before receiving payment. This delay creates a huge mismatch between the money coming in and going out, thereby creating a cash crunch.

To bridge this gap, many logistics companies turn to working capital business loans. 

However, traditional loans can be difficult to secure quickly and often come with high-interest rates. This is where invoice discounting for logistics emerges as a viable alternative.

What is Bill Discounting, and How Does It Work?

Bill discounting means the selling of unpaid invoices to a lender or a financial institution at a discount on the face value. It is the means through which a business can draw an effective means of accessing cash immediately to pay the bills without having to wait for the invoice to mature.

Here’s how it works:

1. Invoice Submission: The logistics company submits unpaid invoices to a financial institution or a bill discounting platform.
2. Invoice Verification: The institution verifies the authenticity of the invoices.
3. Advance Payment: Once verified, the institution advances a percentage of the invoice value to the logistics company, usually around 80-90%.
4. Client Payment: The client pays the invoice amount on the due date to the financial institution.
5. Settlement: The institution deducts its fee or discount rate from the payment and remits the remaining balance to the logistics company.

This process is relatively quick and provides much-needed liquidity, allowing logistics companies to maintain smooth operations.

The Benefits of Bill Discounting for Logistics Companies

For logistics companies, bill discounting offers several benefits, particularly in securing working capital:

1. Immediate Access to Cash: This provides immediate access to funds for operational costs, fuel expenses, or even the expansion of the fleet.
2. No Need for Additional Collateral: Compared to collateral-seeking loans, bill discounting makes use of the firms’ invoices to facilitate easier access to funds without putting other assets at risk.
3. Flexible Financing Option: Bill discounting gives companies the option of choosing which bills they want to be discounted and when. The solution is thereby flexible. It enhances more active cash flow management.
4. Improved Cash Flow Management: Conversion of receivables into cash will help the logistics company in cash flow management and ensure adequate liquidity for the smooth running of operations.
5. Creditworthiness Not Affected: Since bill discounting is based on the creditworthiness of the clients, the credit score of the logistics company does not get affected, and it will be easier if the company seeks other forms of finance.

Working Capital Business Loans vs. Bill Discounting: Which is Better?

While both working capital business loans and bill discounting provide access to funds, they differ in their approach and implications for logistics companies.

• Working Capital Business Loans: These are loans given by banks and other financial institutions, but in this case, for business purposes. However, the grant of a loan takes some time, plenty of documentation, and collateral. If cash flow problems persist, the set repayment schedule and interest rates further burden the company’s resources.
• Bill Discounting: Bill discounting, as already stated, involves the use of any outstanding bill to secure immediate liquidity. It is a quicker, more convenient method with NO repayment schedule. The incurred charges, also known as discount rates, are generally lower than the interest rates suffered in traditional lending. Even logistics companies with high receivables can benefit from this method.

Bill discounting, therefore, becomes speedy and responsive compared to working capital loans provided through systems of traditional lending of working capital to the logistic businesses of a company or cash-flow difficulties arising from late payments.

The Process of Invoice Discounting for Logistics Companies and Its Impact on Cash Flow

Invoice discounting for logistics is a subset of bill discounting specifically tailored for the logistics industry. It involves the same basic process but is customised to meet the unique needs of logistics companies. Here’s how it works:

1. Submit Invoices: The logistics company submits its invoices to the discounting platform, typically after delivering goods or services.
2. Verification and Approval: The platform verifies the invoices and assesses the creditworthiness of the clients.
3. Advance Payment: Once approved, the company receives an advance, often up to 90% of the invoice value, within a few days.
4. Client Payment: When the client pays the invoice, the discounting platform receives the payment.
5. Final Settlement: The platform deducts its fee and transfers the remaining amount to the logistics company.

This process significantly enhances cash flow, thereby providing logistics companies with the opportunity to operate daily activities with no headaches concerning the clients’ delayed payments. Also, given the fact that the platform is responsible for the evaluation of the creditworthiness of the client, logistics companies with strong clients can negotiate rates and terms that are more favourable.

When Should a Logistics Company Consider Bill Discounting?

While bill discounting is a valuable tool for managing cash flow, it’s important for logistics companies to assess when it’s the right time to use this service. Here are some scenarios where bill discounting can be particularly beneficial:

• Experiencing Delayed Payments: If your logistics company frequently experiences delays in receiving payments from clients, bill discounting can provide the immediate cash flow needed to cover expenses.
• Seasonal Demand Fluctuations: During peak seasons, when demand increases, bill discounting can provide the necessary funds to scale operations quickly.
• Expanding Operations: If your company is looking to expand its fleet or services, bill discounting can provide the capital needed without taking on long-term debt.
• Managing Multiple Clients: For logistics companies managing a large number of clients, bill discounting helps streamline cash flow management, ensuring steady liquidity.

Final Thought

Logistics companies require a continuous flow of cash in their business. They can avail conventional working capital business loans, which more often than not, come with some limitations relating to long procedures for approval and at very high rates of interest. Bill discounting is thus a flexible, quick, and effective method of raising funds against outstanding invoices.

With invoice discounting for logistics, the choice will cover the gap between invoicing and payment. Most basically, it allows one to ensure the availability of working capital to support operations, meet client demands, and invest in growth.

For any logistics company looking for an efficient and satisfactory means of improvement in cash flow, bill discounting solutions are one of the avenues to consider. KredX, one of the biggest solution providers for supply chain financing in India, offers invoice discounting services particularly designed to help solve various logistical business needs. Contact us to discuss your way forward.