Jan 26 2012
Invoice Discounting: Your Alternative to Traditional Business Loans
If you own a business and your clients are other businesses, you should become familiar with invoice discounting. Businesses who buy products and services from other businesses often choose companies who offer their services and products for sale on account. If you do not offer your products and services on account, the business is more likely to go to a company that will. When you bill clients on account, you would like to imagine that the company would pay in just a few days or weeks. The truth of the matter is that some companies will wait as much as 60 days to send a payment in. If you are relying on this money to pay for rent, utilities, and payroll it can be very hard to manage. Understand what invoice discounting is and how you can factor it into your business to get the cash flow you need to stay afloat.
What is Invoice Discounting?
Invoice discounting, which is also referred to as factoring, is when a discounter purchases a company’s account receivables at a discounted rate. The discounter, which is a third-party, will advance you up to 85 percent of the face value of the account that has not been collected. Each time you raise a new invoice, the company will advance you another percentage of the invoice and will in turn charge a fee for collecting on the debt. When the debt is collector, the discounter will forward you the remaining percentage of your invoice value minus the fee the company charges for collection services and advances.
The Benefits of Invoice Discounting
Now that you understand the basics of how discounting works you need to realize the benefits. If you are a small business owner, applying for a loan is not a feasible option. Lenders are very strict and require proof of revenues. This can be difficult to supply if you have only been in business for a few months. Invoice factoring and discounting are two ways to generate the working capital you need to stay afloat while still keeping your clients happy. You can offer your services and products on account without letting your business suffer.
Another benefit is the fact that you do not have to hire your own collections representatives to call the companies and ask for payment. The discounter has their own team of collections professionals and they will do their best to collect on the debt so they no longer have to handle the account. If you want to reduce your payroll expenses and the duties you do in office, this is a great solution.
There are a number of different invoice discounters. You need to choose a reputable invoice discounting firm that has built a known name in the industry so you can avoid doing business with a company that does not do good business. Make sure you discount good debt so you can protect your interests and your advance money. Invoice discounting is just one alternative to traditional small business financing.
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