Invoice discounting can help your business get instant working capital. If your business has its cash tied up in unpaid invoices, this facility provides an apt solution. You can use these funds to cover operational costs or maintain a smooth cash flow. You can also choose to invest the acquired funds in assets. To know more about invoice or bill discounting and its advantages and eligibility, read on.
Table of Contents
What is Invoice Discounting?
Bill discounting is an invoice financing tool that helps your business get instant cash. You can visit a bank or an invoice discounting platform and get funds against any unpaid customer invoices. The customer pays their dues to the bank directly and the bank charges you a commission for the service. This way, you can maintain smooth business operations by getting your receivables sooner.
Advantages of Bill Discounting
This tool provides various advantages to businesses in running a smooth operations. Some of these advantages are:
- Gives you increased cash flow and instant access to cash
- Speeds up the working capital cycle
- Remains confidential, as there is no obligation to inform clients
- Helps your business retain control
- Allows you to pay interest only on borrowed money
- May offer dad debt protection
- Enables business expansion
- Monetises receivables stuck in unpaid invoices
- Reduces dependence on secured bank loans or other types of debt
- Offers competitive pricing based on your business or personal credit ranking/rating
- Gets you funds with no collateral required
- Comes with a simple documentation process
- Offers flexibility in the use of funds
Also Read: How to Grow Business With Personal Loan
Eligibility Criteria
Fulfil the following criteria to ensure your business is eligible for this financing option:
Registration and Operation
Your business must be officially registered in India. It should also be operating in India.
Revenue Threshold
Most lenders may ask for a certain amount of revenue or turnover. This amount may vary as per the lender.
Invoicing Track Record
Your business must generate accounts receivables and have a customer invoicing history.
Creditworthy Customers
Your customers should have a good credit record. This determines whether they will pay their invoices on time.
Good Credit History
Your business must also have a good credit record and financial status.
Check Your Credit Score Online
Financial Documents
You may have to provide audited financial statements or other relevant documents to demonstrate the financial status of your business.
Invoice Information
You must provide details about the business invoices you want to discount. The details should include:
- Customer’s name
- Invoice amount
- Payment terms
Invoice Discounting vs Invoice Factoring
In addition to this, invoice factoring is another invoice financing solution that can help your business get working capital. Refer to the following table to learn more about the differences between the two solutions.
| Factors | Invoice Discounting | Invoice Factoring |
|---|---|---|
| Meaning | Access funds against unpaid invoices and retain control | Sell unpaid invoices where the factoring company handles credit control |
| Control | Businesses manage sales ledger and customer relationships | Factoring company manages sales ledger and collections |
| Confidentiality | Financing is undisclosed to customers | Customers are aware of the arrangement |
| Collections | Businesses collect payments | Factoring company collects payments |
| Flexibility | Choose which invoices to finance | More structured, often involves all invoices |
| Costs | Lower fees, more business responsibility | Higher fees, comprehensive service |
| Bad Debt Protection | Not provided | May include bad debt protection |
| Creditworthiness | Focus on business credit rating | Focus on customers’ credit rating |
When pursuing business endeavours, unpaid customer invoices could tie up the inflow of revenue. Invoice discounting ensures that you have the working capital you need to achieve your business dreams.
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FAQs on Invoice Discounting
Is invoice discounting profitable?
Invoice discounting can be a good solution for any business in need of immediate working capital.
Is invoice discounting legal in India?
Yes, invoice discounting is legal in India. The factors that establish its legality are:
- It is governed by the Factoring Regulation Act, 2011
- Invoice discounting platforms fall under the purview of the PSS Act, 2007
- TReDS regulates invoice discounting, executing rules and tools for growth
What are the advantages invoice discounting?
Some of these are as follows:
- Confidentiality
- Instant cash
- Collateral-free finance
- Businesses have full control
- Unlock tied-up cash
- Better cash flow
What are some disadvantages of bill discounting?
A few disadvantages of bill discounting include:
- High commission charges
- Overuse can lead to a bad reputation in the industry
- Volatile nature due to short-term focus
