Invoice discounting is one of the invoice finance methods that offer your business cash for invoices that your customers are due to pay. Small and medium-sized business SMEs usually find themselves in cash constraint positions and need access to quick cash. Invoice discounting, however, can provide an instant solution for such challenges as it offers cash for unpaid invoices and offers a flexible monthly payment plan.
How Invoice Discounting works
In invoice discounting the business in question (the borrower) agrees with the lender to get a certain percentage of the amount due on the customer invoices. This can be of a range of 75%-95% the value of the invoices. The borrower then agrees to pay a certain amount on a monthly basis until the amount is settled. The borrower in question then can wait for the customers to pay off their invoices at their own time while using the cash allowed by the lender.
Do not confuse invoice factoring with invoice discounting
The main difference with Invoice Factoring and invoice discounting is who controls the invoice ledger. While in invoice factoring the lender takes control of the invoices and makes sure they have received payments, in invoice discounting the business in question the borrower remains in control of its customer’s invoices and manages their credit on its own.
This is a key advantage as your customers as a business will not be able to know whether you are using invoice finance or not. In invoice factoring, however, customers are informed of your financing options as they make payments to your lender.
Also, invoice discounting becomes a better financing option when dealing with sensitive customers or when your business involves dealing with private and confidential business activities that you might not want to involve third parties.
On the other hand, invoice discounting is more time consuming and requires more managerial skill from the business as you are required both to manage the monthly payments to your lender while keeping track to your customers. This can be both tiring and time-consuming. Invoice factoring, however, releases you off the hustle of following customers to make sure that they make their payments so that you may have enough cash to settle your monthly agreements with your lender as they are the ones in control. This is an advantage to small businesses as they have the time and the necessary concentration required for growth.
Benefits of using invoice discounting
When using invoice discounting, you stand to benefit quite a lot, from accessing quick cash to having a secure relationship with your customer invoice discounting becomes an ultimate solution to small and medium-sized businesses SMEs needs.
Quick access to cash
Many small and medium-sized business SMEs get into cash constraints and re tied up from operating and growing. At Momentum Credit we expand your possibilities. We offer invoice financing of up to 85% the value of your invoice. After opening an account we then calculate the amount you are allocated and the monthly payments you will pay. We also do not take any collateral. This is very beneficial to small and medium-sized businesses SMEs as they get trouble securing a loan from other financial institutions such as banks which take a lot of time require collateral and are not sure either.
Invoice discounting is confidential as the customer does not need to know that you are using any form of invoice financing. This is because invoice discounting allows you to control the invoices you are using to get cash. Controlling the ledger also means that you are still in control.
No collateral required
When accessing a normal bank loan collateral is what puts off a lot of businesses. These are especially when you are a small or a medium-sized business and are tight on physical assets such as land title deed or a car logbook. A good credit history also is key, when applying for a traditional bank loan. This makes your options as a small business limited and invoice discounting automatically becomes a viable option as not collateral apart from the invoice is required.
When invoice financing is not an option
Although invoice discounting is a great option for your business, there are circumstances under which it does not make a good option. A good example is when you do not have enough invoices to be used as the collateral on which you access credit. In this circumstance, invoice factoring can be of better assistance.
Inconsistent customer payments
In case your customers are very inconsistent the invoice factoring can be very tricky to handle. This is because you are required to make regular agreed payments on to the lender. Irregular customers also make handling them more difficult draining you the energy you could have focused on growth and other important business activities to chasing customer payments. This is quite unhealthy for small business as growth becomes more difficult to implement.
When having time constraints, invoice factoring may as well be the better option. This is especially if you have few staff that instead on following up on customer payments would rather have them focus on something else. Invoice factoring allows you the time and energy to do other business as they take control of the invoices from your customers and follow them up for payments
To wind this up, invoice discounting is still a very quick and amicable financing solution to a small or a medium-sized business. This is because it is easy to access, provides quick cash solution and does not require any collateral apart from the invoices due from customers. Mover over it gives you as a business control gaining experience and the real picture of how your business work as how you can manage customers and payments as a whole.