The duration of the invoice cycle, which is 60 to 120 days, is a pain area for many businesses. The gap between the invoice generation and payment dates locks companies’ cash, causing liquidity and cash flow problems. Invoice discounting is one method to break this invoice cycle curse. If you are considering invoice discounting for your business, it is crucial to know a few essential things about it.
Here’s what you need to know about invoice discounting.
What is invoice discounting?
Invoice discounting is a short-term invoice financing option for small businesses to get money from financial lenders. In this method, you can sell your unpaid invoice to a financial lender at a discounted rate. Hence, the name invoice discounting.
How does invoice discounting work?
The invoice discounting process works in the following way:
Step 1: A business sells a product or service, and an invoice is generated in their system.
Step 2: The invoice is sent to the clients, who get 90 to 120 to make the payment. However, a few businesses do not want to wait that long.
Step 3: The business sends that invoice to a third party (known as the financing company) for discounting.
Step 4: The company will buy your invoice at a discounted rate and give you the money, usually 80% of the invoice value.
Step 5: Once the customer makes the payment for the invoice, the financing company gives you the rest of the invoice amount after reducing their fee.
What are the benefits of invoice discounting?
There are several benefits of getting your invoices discounted. Some of the most prominent ones include:
- Enhanced cash flow: One of the benefits of invoice discounting is enhanced cash flow, as your money does not get stuck for months. You can get the cash quickly, which is not the case with other borrowing options in the market, such as bank loans.
- No need for collaterals: Unlike other financial borrowings you take, you don’t need to have collateral to get money with invoice discounting. Your invoice is all you need. It is especially beneficial for small businesses with few assets to show as collateral.
- Flexibility: Most financing companies can come up with flexible plans to adapt to your business needs regardless of whether you are a small or big business.
How is invoice discounting different from invoice factoring?
Although invoice discounting and factoring are similar invoice financing options, there is a significant difference between these borrowing methods. With invoice factoring, the third party or the factoring company takes care of the sales ledger, credit control, and debt collections. However, with invoice discounting, you must take care of all these responsibilities.
About Ignite Business Group
If you are looking for a reputable and reliable invoice factoring company in the UK, Ignite Business Group Ltd. should be your first choice. With over 25 years of experience in the field, we can take care of all your invoice troubles. You can quickly get your invoices discounted or factored in by providing essential information and invoice copies here. Reach out to us at 01332 896 020 or fill out our online contact form to know more.