Advantages of Invoice Discounting
TIM Invoice discounting is comparatively quicker and faster method to procure cash than applying for a loan in which credit institutions or banks take quite a lot of time in credit appraisal of the borrower. Invoice discounting provides liquid cash to business as soon as an invoice is issued. It accelerates cash inflow by converting sales receivables into cash. The cash injection can be invested in increasing sales, pursuing growth, capital investment, repaying critical debts etc.
Releases locked cash
Invoice discounting releases cash that has been locked in customer invoices for a long period of time. Invoice discounting converts the company’s account receivable (debtors) into liquid cash. This may even be used in cases of emergencies.
Reduced collection period
Collection period refers to the time taken by accounts receivables to realize into liquid cash. The collection period is generally the credit period allowed. Invoice discounting facilitates the provision of finances by taking an advance from the invoices issued. Thus, a businessman may collect his blocked funds without waiting for the entire credit period against a fee.
Improves cash flow
Invoice discounting provides improved cash flow since up to 85% of the advance invoice amount (receivable) can be converted into cash thereby aiding shorter working capital cycles.
No asset as collateral
Cash can be obtained without using any assets as collateral; only invoices to which customers are yet to pay are submitted for the transaction. Financiers require just account receivables as collateral. No inventory, property or other movable item is pledged. Hence, entities which have a large amount of pending receivables can release the funds quickly and hassle free.
No effect on business relations
TIM The business relations between the seller and buyer are not hampered in case of invoice discounting. Discounting companies have no or very little contact or correspondence with the buyer. Hence, the buyer is sure that he would continue to be liable to the seller, not to other parties.
Allows more room for credit sales
The company can choose to grow sales in terms of cash or credit. Sales that are on credit can be converted into cash quickly and the company need not bother much about the liquidity issue which comes with credit sales if invoice discounting process is in place.
The seller continues to exercise control over the sales receivables. He has the sole right to manage the credit terms, negotiate further deals, collect the payments etc.
In the case of invoice discounting, confidentiality can be maintained by the discounting houses. The suppliers and customers need not know about the borrowings of the company against sales invoices. The agreement between the financier and you/your business is not disclosed to your customers.
Win-win situation for business
The borrowing company can obtain the cash it needs whereas the customer can be given the credit period. This creates a win-win situation for the company and the company’s customer which in turn helps in building a healthy relationship with customers.
Disadvantages of Invoice Discounting
Decrease in profit margins
TIMThe financial institution providing invoice discounting generally charge a fee which becomes a cost to the company (a discount on the face value of the invoice issued). This decreases the profit margin for the borrowing company, but its important to bear in mind that the discount fee charged is small and only charged when invoices are discounts, unlike a loan where interest is charged on an ongoing basis irrespective.
Some people perceive invoice discounting as a stigma over the company, hence, excessive reliance on invoice discounting may not be taken very positively by all stakeholders.
Only commercial invoices
Invoice discounting can only be offered on commercial invoices. If a company deals with general public (the consumer) then that company will not be eligible for invoice discounting.