Using Invoice Discounting For Cash Flow
Invoice discounting is basically the same as invoice factoring:
it involves selling your invoices that are not yet due to be
paid to a company at a discount. The discount provides the
company purchasing your invoices with their profit; but by
receiving cash now for your invoices, invoice discounting
enables you to:
* Meet emergency expenses * Pay suppliers early to take
advantage of early-payment discounts * Take on time-sensitive
new projects * Expand your business more quickly * Pay for
costly advertising that will bring in more sales * Beef up your
business prior to crucial time points
Invoice discounting involves finding a company that will
purchase your accounts payable at a discount that depends on the
length of your payment window. The discount generally ranges
from about 1.5% to 5% for every ten days until payment is due,
with the lower discount percentages going to the most
creditworthy of the companies that owe you money. Your company's
creditworthiness has no bearing on this sale. And with invoice
discounting, you can sell part or all of any reasonably
creditworthy debt.
You can either sell your invoices on a notification basis which
means the company that purchases your invoice also collects on
it or you can work out terms with the company purchasing your
invoices on a self-collect. The difference is when it's a
notification sale, your debtors will pay the invoice discounting
company directly. If you collect debts yourself and then forward
to the invoice discounting company, your customers will never
know that you sold their invoices to another company. It is
easier to sell invoices on a notification basis because the
invoice discounting company knows, this way they will get their
money back in a timely fashion.
The main advantage of selling invoices on a notification basis
is that the factor, or invoice discounting company, is then
responsible for collecting the debt and assumes all the credit
risk. The factor is often a broker, not the company purchasing
your invoices. Using invoice discounting on a regular basis to
fund your company can eliminate the need for staffing a credit
and collection department, which equals another saving for you.
Other Ways to Use Invoice Discounting
If you establish an ongoing relationship with an invoice
discounting company, you can even establish the equivalent of a
line of credit based on your invoices. Instead of using all the
funds forwarded to you in payment for your invoice, you take
what you need and leave the rest with the invoice discounting
company. The discounting company allows your account to accrue
interest, and you can draw on the account as you need cash.
If you're not ready to sell invoices outright, you can try using
accounts receivable as collateral for a loan. This involves
getting a bank to accept both your credit and your debtors'
credit, and then collecting cash equal to at least half and up
to ninety percent of your accounts receivable. This is a little
cheaper than invoice discounting, but it can also be both slower
and less flexible.