What You Should Know About The working capital/bill discounting?
Small business has to fight uphill battles just to survive the market. The main issue that disables many SMEs are the hindered cash flows. One wrong move and they are out of business. And in such times, it is important that the business has some kind of backup that proves lucrative.
Fortunately, bill discounting comes to the rescue. This innovative practice is implemented so that a business can gain immediate access to cash. And that, too, without the need for collateral. Just an invoice is enough to proceed with borrowing the money.
What is the need for bill discounting?
The fundamental need of bill discounting is to speed up the cash movements from the customers. Its only purpose is to provide the seller with immediate cash. The seller does not have to wait for the client to pay. Instead, the financial mediator pays the cash upfront just by holding on to the invoice.
How does bill discounting help with working capital?
If you are an entrepreneur, then you must know how important working capital is. You can define it as the lifeblood of a business.
Small business tends to absorb all the direct costs, labour, or the other expenses even before it actually gets paid. Landing a huge customer may be a great deal for an SME to do good business. But things take a turn to worst when the customer demands long payment terms. This will inevitably hurt your cash flow.
Bill discounting is a significant source of working capital finance. This is because it limits the need for bank financing. Also, invoice finance is pleasing then bank. Because it depends on unpaid invoices from the debtor.
Why does your business need a bill discount?
It is often tough for the SME to survive when the customer leverages long-term payment. At such times, even banks aren’t able to provide immediate relief to the cash flow problem. Furthermore, your seasonal sales can put a lot of stress on your working capital.
However, when you opt for a bill discount, you unlock the cash from the invoice. And that fund you can further use for:
- Increasing inventory to increase seasonal demand
- Offering payment discounts to customers who pay earlier
- Investing in hiring new staff
- Gaining new customers by offering longer payment terms
What is invoice factoring and invoice discounting?
Both invoice factoring and invoice discounting are financial facilities. They both help in unlocking the cash trapped in unpaid invoices. Factoring, for example, is applied by smaller enterprises or smaller startups. However, invoice discounting is applied by the larger firms.
The main difference between these two financial facilities is who controls the accountability or sales ledger to get the payment.
For invoice factoring, the provider takes the role of managing accountability. They have control over credit. And they also chase the customers during invoice settlements. With factoring, the customers have to resolve their case directly with the provider. This means the customer is alerted about the whole borrowing process.
On the other hand, with invoice discounting, your business is accountable for the sales ledger. This facility follows the payment system in a normal way. The third-party that is the customer isn’t engaged in the process because he will have to recompensate to you.
The advantages of invoice factoring:
- The funds borrowed through invoice factoring can recover your cash flow. This working capital will inevitably allow your business to expand.
- In hand, working capital increases bargaining power. You can use it to offer early payment discounts.
- The extra cash will be developed alongside your business. This means you can use it to expand your business.
The advantages of invoice discounting:
- The overall service is confidential. You can stay in touch with the customer without them having any knowledge about the capital agreement.
- Massive amounts of human resources can be easily managed through invoice discounting.
Bottom line
Bill discounting is a wise way to take complete advantage of your company’s due accounts, that is the unpaid invoices. If you do it accurately, you can manage your company’s cash flow efficiently.
We hope our blog was able to give you proper insight.