Invoice discounting is a financial tool that can help small businesses get access to cash when they need it. Businesses can use invoice discounting as an alternative to traditional loans, which can have much higher interest rates. Invoice discounting does come with some drawbacks, though—and each business owner should weigh them against the benefits before deciding whether this type of financing is right for their company.
Invoice discounting is a way for businesses to borrow money from a lender based on the amount of their outstanding invoices.
The process is simple:
· You get an invoice from a customer, which is paid in full shortly after it arrives.
· You send the invoice to your lender, who gives you an advance against that invoice. This allows you to pay for other expenses until your customer pays (or pays part of) the invoice and returns it to you with payment received (PRA).
Invoice discounting is a way for businesses to borrow money by using their unpaid invoices as collateral. Invoice discounting is also a way for businesses to get a loan from banks, but it's not always the same as invoice factoring (a different way of financing businesses with payment terms).
In order to understand how invoice discounting works and why it's useful, you need to know what an "invoice" is. An invoice is essentially an IOU that you give your customers when they pay you—but there are two types:
· A "trade receipt" is just for tax purposes—it shows how much someone owes or has paid you. It doesn't indicate whether someone owes or has paid interest on that debt; it just shows what amount of money was exchanged between two parties at one time (and this can vary depending on currency exchange rates). The only person who needs this document is usually your accountant or bookkeeper--and even then, some companies don't use them anymore because most systems today can automatically generate these kinds of reports from bank statements instead!
Pros:
· Increased cash flow: Invoice discounting allows you to access your revenues faster than you could with traditional financing. You get paid immediately and can use the money to pay other bills, invest in new business ventures, or simply improve your cash flow.
· Lower financing costs: Invoice discounting isn't a loan and doesn't have the same high interest rates associated with those types of financing. In fact, it's often less expensive than other forms of non-bankable funding because there's no collateral required and no prepayment penalties (for example, if you miss a payment).
· No collateral required: Unlike some other forms of financing like factoring or bank loans, invoice discounting requires no collateral at all! This means that even if someone defaults on their payments or doesn't pay you back at all (known as "chargeback"), your business won't lose any assets such as equipment or property when they do so (aside from whatever value has been added by doing business together).
If you’re a business owner, how do you know if invoice discounting is right for you?
· If your business has a steady customer base and can pay its bills on time, then invoice discounting may be the right solution for your company. This is because invoice discounting companies are willing to work with businesses that have a good credit rating.
· It’s also important to consider your relationship with your bank before choosing this option. While it might seem like a good idea at first glance, it may not be worth the hassle if there's tension between you and your bank in general.
· Review your cash flow.
· Look at your credit history.
· Consider a business structure that works for you - if you’re self-employed, this may be as simple as incorporating yourself and purchasing an EIN number from the IRS (if you don’t already have one). For small businesses (with fewer than 100 employees), there are several easy steps to take: incorporate, file annual taxes, and open a bank account in the name of your company.
· Consider whether or not invoice discounting is right for you now - if so, what kind of financing will best meet your needs?
Invoice discounting is a great option for small businesses looking to increase their cash flow. For example:
· You need money now and don't have time to wait for a customer to pay you - invoice discounting can help you get that money in your pocket sooner, without having to pay interest or late fees on late payments.
· You don't want to take out a big loan or line of credit just yet because it will impact your overhead costs - invoice discounting allows you to avoid taking on any new debt until the company is ready for it.
· You're not sure if the business will be successful enough yet, so there's no point in borrowing from banks at high interest rates - invoice discounting lets you test the waters without risking too much capital up front.
In summary, invoice discounting is a good way for small businesses to expand their cash flow if they’re looking for financing options. It’s important to note that this type of financing isn’t right for every business—only those that have proven their worth and are willing to work with a lender. If you think invoice discounting might be right for your company, contact your local bank or credit union today!