What is Invoice Discounting?
One of the fast-growing ways of financing small businesses is invoice discounting. In this article, we will give you an introduction to invoice discounting and how you can use it for your growing business.
What is invoice discounting?
Invoice discounting is a way for businesses to borrow money that is collateralized against their accounts receivable. It is an extremely short-term form of borrowing which is used to unlock funds and finance working capital.
Why use invoice discounting?
When you send out an invoice to your customer, it could take up to 30 days for customers to pay their bills. Meanwhile, your business may face a liquidity crunch during that period. Invoice financing is a great way to ensure sufficient cash flow for your business requirements. It helps pay employees and suppliers, sustain operations and invest in business growth earlier without having to wait for your customers to pay their balances.
How it works
Getting funds with invoice discounting is very simple and has 3 main steps:
- First, you sell your product or service to a buyer on credit and give an invoice to the buyer. The buyer accepts the invoice and acknowledges paying the amount on the due date. Since you want cash before the due date, you approach a financing company to discount the invoice.
- Once the invoice is reviewed and approved, the financing company avails the funds to you. Invoice financing companies typically lend up to 70–90% of the invoice minus the lending service fee and interest rate on the amount borrowed.
- You collect payment from your client as normal on the due date. It is only then, you repay the amount lent from the financing company. With invoice financing, you still retain control over customer relationships
What you didn’t know about invoice discounting
- Invoice financing is also known as “accounts receivable financing” or simply “receivables financing.”
- Invoice financing can be structured at the clients’ discretion. The business’ customer doesn’t need to be aware that their invoice has been financed.
- Invoice financing applies to invoices of goods or services sold on credit.
- There is a difference between invoice discounting and invoice factoring. With invoice discounting, you manage the credit control (the collection of payment from the client). In invoice factoring, the funder purchases the unpaid invoices and takes over collections.
How do fees work?
Usually, the finance company will allow you to borrow up to 70–90% of your outstanding invoice. It’s important to note that there is:
- a fee for the service
- an interest rate is put on the amount borrowed
Benefits of invoice discounting
Invoice discounting bridges the cash flow gap between paying suppliers and getting paid. It is pretty straightforward:
- You unlock capital right away
- There’s no long-term contract or commitment, unlike loans
- You no longer need to wait for your customers to pay you back
- No collateral is needed as the invoices are collaterals themselves — there may be a charge against the assets of your business.
- It protects your business from non-payment of invoices with bad debt protection
How Zetl can help you
Here at Zetl, we help SMEs build their business by providing a variety of funding which includes invoice discounting. We offer up to 80% of the invoice value upfront within 24 hours. You only need to repay once the client settles, so you can focus on what truly matters — growing your business.
Why choose us?
We are fast and flexible. Get paid the same day you issue the invoice. Repay only when your client settles.
Fully digital. Complete everything online- submit documents through our web-app, all contracts are executed digitally.
Confidential. Your client never needs to know about Zetl. All financing is fully confidential.
No personal guarantees. We believe business risk should be kept separate from personal liability.
Unlock funds by signing up on our website now! — www.zetl.com