The Enigma Of Invoice Discounting & Financing Receivables

Though some businesses often refer to invoice discounting and financing receivables as an ‘enigma’, it’s safe to say they are not mysterious in any aspect. The reason why most businesses struggle with invoice financing is often because of inadequate knowledge about it.  In case you are having some difficulty understanding the concept of invoice discounting and financing receivables, let’s demystify it. Take a quick look at the fundamentals below to gain insight into these financing tools and how you can make the most out of them!

An Introduction To Invoice Discounting

It is a part of invoice financing, allowing companies to use their unpaid accounts receivable to access capital tied-up in them. It comes in handy in multiple ways. However, its primary purpose is to provide organisations with immediate access to funds. Typically, two parties are involved directly with the discounting process, i.e., the seller and the financier (who discounts the invoice). You should note that a financier retains a portion of the invoice amount until maturity. Once the seller collects the invoice amount and deposits, the financier releases the remaining balance after deducting their service charge. This arrangement comes in handy for those who sell products or services to customers on credit with a repayment tenure of up to 90 days. Invoice discounting platforms not only help businesses access funds to meet immediate working capital requirements but also to hone professional relationships with customers.  How? Customers are not included in the invoice discounting arrangement, which helps companies maintain confidentiality. In turn, it allows them to preserve an image of favourable financial standing. 

Financing Receivables – A Brief Insight

It is an arrangement wherein businesses use their receivables to access funds and keep their everyday activities moving smoothly.  In a broader sense, one can categorise financing receivables as –
  • Sale Of Receivables

Businesses take out a percentage of their unpaid receivables and sale them to buyers (financiers). The entire transaction is treated as a virtual sale. Note that the financier approaches the business’s customers after a specified period and collects the invoice amount. This leaves very little room for confidentiality. 
  • Secured Loan

In this arrangement, accounts receivable is used as collateral and helps businesses obtain cash against its total value. Contrary to popular belief, financing against receivables or invoices adopts an entirely different approach from discounting in terms of legalities, procedure, margins, and accounting treatment.  

Alternative Financing Option – Accounts Receivable Financing

Accounts receivable or invoice financing is an alternative means of funding. Unlike business loans or most trade credits, this option does not add to a borrower’s debt burden. In fact, with its help, you can release the capital tied-up in a long working capital cycle or multiple unpaid invoices. However, like most secured and unsecured loan options, you would be required to meet a few criteria (set by the financier) to access cash through this option. Typically, accounts receivable financing or invoice financing in India helps businesses cater to immediate cash flow requirements and thus come with a repayment tenure of up to 90 days. Bottom Line Financing invoices is a more comprehensive approach towards funding working capital requirements; whereas, invoice discounting is essentially a part of it. While invoice discounting involves selling them on a platform like KredX at a discounted rate, financing receivables can either mean selling or factoring them to access funds. Based on the scope, confidentiality, and collection method, businesses in need of working capital may choose any form of financing receivables.