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As a commercial document, an invoice depicts the information about product or services sold on cash/credit, along with the terms of the deal and method of payment. An enterprise can finance invoices in two distinct ways. It can finance an invoice either through cash sales or as receivables.
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What is Invoice Discounting? Ph No:(+91) 9711550329
As a commercial document, an invoice depicts the information about product or services sold on cash/credit, along with the terms of the deal and method of payment. An enterprise can finance invoices in two distinct ways. It can finance an invoice either through cash sales or as receivables. Invoice discounting, as an asset-based loan, enables enterprises to raise credit by using receivables as collateral. There are a number of financial institutions who help business owners to improve cash flow situation and raise working capital by extending term loans or line of credit against unpaid invoices. Invoice discounting is also popularly known as bill discounting.
Understanding Important Aspects of Invoice Discounting Asset Based Loan A business owner can avail invoice discounting just like other asset-based loans. But he needs to secure the term loan or line of credit through accounts receivables. Hence, the amount of the loan or line credit varies account to the amount of invoices used as collaterals. There are a number of financial institutions that advance funds to both start-ups and existing businesses against unpaid invoices.
Types of Invoice Financing An enterprise can avail credit through various types of invoice financing. There are a number of lenders who provide cash advance or line of credit to businesses as a percentage of the value of multiple invoices. At the same time, certain financial institutions also provide cash advance or term loan against selected invoice. Hence, a borrower has option to discount multiple invoices according to his working capital requirements and cash flow situation.
Invoice Discounting Process A business owner can avail this asset based loan simply by sending invoice details to the lender. The lender will evaluate the invoice details and pay a percentage of the invoice value as a term loan or line of credit. Most lenders allow business owners to borrow 80% of the face value of the invoices. Once the invoice is due, the lender collects the payment from the customer, and pays remainder of the invoice to the borrower after deducting his service fee. Hence, an entrepreneur can raise finance by discounting invoices just like conventional line of credit.
Eligibility Criteria Most lenders lend money to creditors against value of unpaid invoices. But most lenders assess the eligibility of the lender based on a number of parameters while processing the asset based loan. The eligibility criterions differ from lender to another. Also, the eligibility criterion differs from start-ups and existing businesses. While discounting the invoices of an existing business, the lender considers its annual turnover, age, and CIBIL score. But the lender while discounting invoices of start-up considers if the business is already earning profits or about the break even.
Advantages of Invoice Discounts Unlike other asset based loans, invoice discounting enables entrepreneurs to raise finance by using unpaid invoices as collateral. Hence, it becomes easier for business owners to raise working capital without increasing liability or taking additional loans. Also, most lenders provide cash advance to business owners against invoices within 48 hours. Hence, it becomes easier for the entrepreneur to accelerate and improve cash flow situation. At the same time, the business owner can avail the short-term credit without informing customers about pledging their invoices.
