Delayed payments are every business owner’s dilemma. In fact, some customers may take 30, 60, or even 90 days to pay, which can easily disrupt a small or medium-sized company’s operations. The good thing is that financing solutions like invoice discounting can bridge this delay, allowing businesses to receive their much-needed working capital. But here’s the question: what is invoice discounting, and is it a good fit for your business?
In this post, we talked more about invoice discounting service, its pros and cons, and what alternative you can explore. Keep reading to see if this is the financing solution your business needs.
What is invoice discounting?
Invoice discounting, also known as confidential invoice discounting, is a form of funding against your outstanding accounts receivables. It allows you to leverage your unpaid invoices, so you can borrow money from a discounting company of up to 90% of the invoice value.
Unlike factoring companies, invoice discounting remains confidential. Your customer will not be notified that their invoice was discounted, allowing you to maintain your client-customer relationship.
However, you should also know that you’ll remain responsible for collecting the discounted invoice. This is the opposite of factoring, where the factor takes over the collections process to reduce your administrative burden.
Aside from that, you have to submit your entire invoice book when using a discounting service. You can’t always pick the invoice you want to discount, which is something you can enjoy with factoring.
How does invoice discounting work?
The invoice discounting process is pretty straightforward. Here’s what you can expect from this financing service if you decide to try it for your business:
Step 1. You issue an invoice to your customer.
First, you need to issue an invoice to your customer once you’ve delivered the products or services they ordered. Most business owners wait a certain period to see if their customers pay the invoice.
If not, then invoice discounting for small businesses becomes their next resort.
Step 2. You send your invoice book to a discounting company.
To get your invoice funded through discounting, you need to send your invoice book to a discounting company. In this case, your unpaid invoice becomes the collateral to the loan or cash advance they will grant you.
But first, the discounting company will assess your customer’s creditworthiness to weed out potential non-payers. In some cases, the discounting company may also assess your business’s credit score, especially for huge invoices.
Step 3. A trust account is set up.
Once your invoice discounting request is approved, a trust account will be set up between you and the discounting company. This is where all the customer payments will go, allowing both you and the lender to monitor the progress of collections.
The good thing is that your customer will not know that it’s a trust account or that a third party is involved.
Step 4. You receive a cash advance.
After that, you’ll receive a cash advance from the discounting company, which could be up to 90% or more of your invoice value.
Depending on your business’s requirements and circumstances, the funds may be received in a few days.
Step 5. You collect the discounted invoice.
Once the discounting company funds your invoice, it’s now time for you to collect it from your customers. You’ll be solely responsible for chasing payments and ensuring that the customer meets your payment terms.
Overall, you need to collect the invoice value to repay the discounting company. Failure to collect the outstanding invoice means you’ll have to go out-of-pocket to fulfill your financial obligations.
Step 6. You receive the remaining balance.
Lastly, once you’ve collected the invoice, the discounting company will send you the remaining balance minus their service fee.
In general, your invoice discounting fee will be a percentage of your invoice’s face value, which can range from 1.5% to 3%. So, if you’re discounting a $10,000 invoice, your invoice discounting costs will be around $150 to $300.
Invoice discounting advantages and disadvantages
Like any form of invoice financing, discounting has its own share of pros and cons. If you’re unsure if it’s a good solution for your business’s pending invoice, the following can help you decide:
Advantages of invoice discounting
- Quick access to funds. Instead of waiting for weeks or months, discounting will let you access the amount tied to your invoice within days. This allows you to cover daily expenses without having to resort to traditional loans.
- Full control of collections. Many businesses prefer having control over the collection of their funded invoices. This reduces the risk of putting off customers who find out a third party is involved in their debts.
- No impact on your credit score. Although invoice discounting works on borrowed funds, it won’t have an impact on your credit as traditional loans do.
- Full confidentiality. Your customers won’t know that you’re using an invoice discounting service. This can be crucial for certain industries or customers.
- No personal guarantees needed. The invoice itself will serve as the collateral to your funding, so additional guarantees are not needed.
Disadvantages of invoice discounting
- Potential for risk. Since you’re fully responsible for the invoice collection, you may have a higher risk of non-payment if you don’t have a strong collections team.
- Administrative burden. Even though you’ll receive fast funding, you still have to deal with collections, accounting, and bookkeeping, among other tasks.
Is invoice discounting the right choice for your business?
With invoice discounting explained, you’re probably wondering if it’s the right for your business. It can be both yes and no, depending on your cash flow goals and the convenience you want to enjoy.
To help you further, here’s a quick rundown of when invoice discounting could or couldn’t be a good option:
Invoice discounting is a good option if…
- You have reliable customers with a low risk of non-payment.
- You have a reliable collections team that can effectively settle invoices.
- You’re keen to retain control of your collections and invoices within your business but still get quick funding.
- You want confidentiality when it comes to the financing services you’re using.
Invoice discounting is NOT a good option if…
- Your customers don’t have a good credit score and could be at risk of non-payment.
- You need help in collecting your unpaid invoices.
- You prefer to choose which invoice you want to fund instead of sending your entire invoice book to the discounting company.
- Your business is currently dealing with administrative challenges and may not handle collections and accounting very well.
- You want to assess your customers’ credit history before discounting the invoice.
What if confidential invoice discounting doesn’t meet my needs?
If you think that invoice discounting isn’t a good option for your business, then you can explore a better alternative: invoice factoring.
Factoring services work similarly with invoice discounting but with potentially better terms.
With factoring, you’ll sell your outstanding invoice to a factor like Factoring Express. If the invoice passed our assessment, we will send you a cash advance of up to 97% of the invoice value on the same day.
The next step is where the major difference between factoring and invoice discounting lies. After you have bought your invoice, we will take over the collection process. This means you can maximize the working capital you just received, and our team will chase payments.
However, you should note that factoring isn’t confidential. Your customer will receive a Notice of Assignment (NOA) informing them of their new payment terms.
Once we collect the invoice, we’ll send you the remaining balance minus a small factoring fee. We can also provide you with administrative support, such as accounting and bookkeeping, to streamline your finances.
So, who’s a good candidate for factoring? At Factoring Express, all businesses are welcome to apply, be it a startup or an enterprise. If you want fast, reliable, and hassle-free funding on your aging ARs, then all you have to do is reach out to us!
Partner with Factoring Express to unlock quick business funding!
At Factoring Express, we provide comprehensive factoring services for a wide range of industries. We can approve your account and fund your invoices on the same day, so you don’t have to wait to receive your working capital.
Also, we don’t have long-term contracts or monthly minimums. You can always choose which invoice you want to factor in and when – total flexibility is right at your fingertips!
With us, you’ll get your own client portal where you can check customer credit scores, aging reports, paperwork, and more. You’ll also get an annual report for tax purposes. In short, quick funding and convenience combined!
If you want to learn more about our service, feel free to contact our Florida factoring company today! Our specialist will be happy to walk you through how we can enhance your cash flow and business growth. When you reach out today, we’ll also give you a 1-week free and no-obligation trial!
