Everything You Need To Know About Invoice Discounting

Invoice discounting is probably the easiest way through which business owners can avail sufficient capital to meet various operating expenses. It is one of the simplest types of financing that allows individuals to avail a short-term business loan by utilising their unpaid invoices. With KredX, you can avail invoice discounting services and get quick access to funds within 24-72 hours*.

Following is a look at what this particular form of financing entails, how it can be utilised and whether it is good for a business’ health and performance.

What is Invoice Discounting?

Invoice discounting is the process through which businesses can leverage their receivables to avail financing for any short-term requirements. Like other forms of invoice financing, invoice discounting works on the same principle, wherein businesses can sell their unpaid invoices to lenders and avail a percentage of their invoice’s value as a cash advance.

The capital availed through invoice discounting can then be utilised for the growth and expansion of a business, thereby increasing operational efficiency.

However, unlike invoice factoring, a degree of confidentiality is involved under the method of discounting. Here, customers are not aware that the business is borrowing against their invoice through a lender. This can often work as a downside for invoice discounting since the business has to chase after the unpaid invoices themselves.

How Does Invoice Discounting Work in Practice?

The process to opt for invoice discounting has been streamlined in recent times owing to the emergence of various fintech lending platforms.

So, if you are looking to avail the benefit of invoice discounting for your business, you must know in detail about how the process works in practice, which is elucidated below.

  • A company prepares invoices against the goods or services sold to its customers.
  • The details of these invoices are then forwarded to the lending institution.
  • Thereafter, funds are offered against a certain percentage of the total value of these invoices.
  • The process of collecting the invoice is then carried out either by the business’s credit controller or by the finance provider.
  • Finally, when the debtor/customer makes a payment against the invoice, the balance amount is forwarded to the business-owner, minus the service fee.

The funds availed through invoice discounting can be utilised to repay debts, pay bills or even undertake expansion plans based on the raised amount. KredX is one such company that offers invoice discounting facility to businesses within 24-72 hours*. Being a completely digital platform, KredX facilitates a paperless and transparent procedure.

Types of Invoice Discounting:

When it comes to invoice discounting, there are a few types that you can choose to maintain a steady flow of working capital. These are –

  • Whole turnover invoice discounting

    With this type of funding against an invoice, every invoice that a business generates across the turnover is discounted to raise funds, irrespective of the needs of the said business.

  • Confidential invoice discounting

    Like its name suggests, with this type of financing, the entire process is carried out in confidentiality. It means that suppliers or customers of a company are unaware of the business raising capital against invoices before payment is received.

  • Selective invoice discounting

    Spot factoring or selective invoice discounting are some of the examples where single receivable invoices are sold to third parties to raise capital.

These are the three principal types of invoice discounting which help companies acquire working capital for their businesses without hassle.

Benefits of Invoice Discounting:

  • Increase in cash flow

    Business owners can release a lump-sum amount otherwise tied up in unpaid sales invoices, and increase the cash flow. This method of availing capital works best for businesses which have a smaller number of clients generating high invoice values. It is mainly because for such businesses, a single unpaid invoice can keep a substantial capital tied up.

  • Instant availability of financing

    With this method, you can avail financing within 72 hours of applying. Thus, the capital is available instantly, much faster than other methods of traditional financing options.

  • Confidential transactions

    You may not inform your customers when you opt for this method of financing, allowing you to carry out the transaction confidentially. It puts a business’s concerns of losing customer confidence to rest.

  • Increased funding with business growth

    Unlike other business loans and overdraft facilities where funding is available only up to the stated amount, you can avail a higher amount with invoice discounting if you generate high-value invoices. Thus, with the growth in your business, you can avail increased funding against such invoices.

  • Protection against bad debts

    When you avail invoice discounting for your business, few financers offer protection against bad debt for your business. This protection comes to force if a customer turns insolvent and fails to pay against the invoice.

    While these are some of the advantages, you must also be aware of a few of the drawbacks of opting for this facility.

Disadvantages of Invoice Discounting:

  • Eligibility

    It might be difficult for smaller companies to obtain credits through invoice discounting. However, businesses may be able to do away with this disadvantage if they can establish a steady track record, and instil confidence among financiers.

  • No assistance in collecting sales receipt payment

    Unlike invoice factoring, you do not receive assistance in collecting your unpaid sales invoices from your financier under this method of financing.

  • Associated costs

    Sometimes associated charges for utilising invoice discounting can be quite high. You can, however, address this shortcoming by looking for financiers offering the best deals with the proposition.

The advantages of invoice discounting, however, outweigh the disadvantages by quite a significant margin. It can, thus, be safely concluded that opting for this method of financing can be quite beneficial for a business.

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    How to Know If Invoice Discounting is Right for Your Business?

    Given that there are so many financing options available in the market, it can be difficult to determine if invoice discounting can be the right choice to fund your business. In that case, you must take note of the following factors –

    • Minimal bad debts for your business.
    • Timely payments from customers, with the entire value of invoices paid.
    • Robust and effective credit control measures.
    • Meeting the minimum turnover level as mandated by the financier.

    If your business complies with the factors mentioned above, opting for invoice discounting can be extremely beneficial for your business. In this regard, you can check the hassle-free invoice discounting option offered by KredX – one of India’s leading invoice discounting platforms offering this facility. Simply upload your invoices on our online portal and avail working capital to keep your business’ operations steady.

    Use our Free Invoice Generator to create
    invoices for your Business.

    Faqs on Invoice Discounting

    Invoice discounting companies typically email or call the enterprises generating the invoices to verify if the details provided are genuine or not.

    Invoice discounting facilities can be availed by businesses across all sectors, including – logistics, manufacturing, services, FMCG, pharmaceuticals, chemical, etc.

    No, these are collateral-free cash solutions, wherein funds can be availed without providing any security.

    To understand if invoice discounting is good for your business, you will need to take note of a few factors like – whether your customers settle their invoices regularly, whether your business meets the minimum turnover criteria, etc.

    With factoring, the financier takes control of the invoice payment recovery, as well as the credit-control process. However, with invoice discounting, you remain in control of invoice collections and receive payments from customers.

    Yes, invoice discounting is a type of loan, wherein the credits are availed against the value of unpaid invoices.

    With invoice discounting, you can enjoy benefits like – quick disbursal of funds, collateral-free availability of capital, simple eligibility criteria, etc.

    If a customer defaults to settle an invoice, funding is removed unless the business has a bad debt protection cover in place.