How You Can Benefit From Invoice Discounting?

Invoice Discounting Benefits

Invoice discounting is a finance facility that allows a company to meet their day to day recurring expenses. It solves the cash flow problem of the company. A company needs cash to execute their day to day activities. Invoice discounting is a type of invoice financing. It is a source of short term borrowing to meet the liquidity needs of a company. In invoice discounting the company uses an unpaid invoice or unpaid account receivable as collateral for a loan which is an issue by the finance company. The amount of loan is less than the amount of outstanding receivable it might be 95% of the value of account receivable.

Some of the important points to show how a business may benefit from an invoice discounting facility are:

•    Invoice discounting in India make it possible to pay suppliers or creditors due to punctually and its increase their credit worthiness. It helps in improving the reputation of the business. It helps to create and maintain a healthy relationship between the company and the supplier, thus giving more bargaining power to negotiate a better deal with suppliers.

Add caption

•    The invoice discounting business uses the unpaid invoice to release cash that is locked in account receivable. Invoice discounting provides immediate cash to help business to meet operating expenses like paying salary to employees and purchase more goods etc.

•    The best thing of invoice discounting is that there is no inventory or asset/movable item as pledge or collateral, In the invoice discounting the company uses the already generated invoice which is still unpaid by its customers. The company uses this unpaid invoice as collateral for receiving advance cash from the lender. Entities which have a huge amount of outstanding receivables can release the blocked funds.


•    Through the invoice discounting facility, entity’s DPO Extension in India, DPO stands Day Payable Outstanding it’s a financial ratio that shows the average time (in days) that a company takes to pay its bills and invoices to its suppliers, vendors or other creditors. This ratio indicates how well company cash outflow is managed.

•    Some clients ignore or delay in dealing when they realize their supplier is facing financial difficulties in business. This may affect the relationship and more chances of losing deals and contracts. In Invoice Financing in India client will know that company are using invoice as short-term finance facility but Invoice discounting allows business to arrange cash without their client's knowledge, that allows business to maintain their relationships with clients.

•    Invoice discounting is the best source to increase and improve working capital in India. Invoice discounting will help to maintain sale ledger, payment chasing, and invoice processing.

 •    Sometimes a business that is facing cash flow problems, and not able to pay its suppliers and that may result a shortage in business’s Inventory. In this situation, the company may continue placing orders to the existing customer but at the same time not able to fulfill or place new orders. Since invoice discounting provides immediate cash flow, the company will be able to pay suppliers and replenish its depleted inventory.

•    With the bill discounting in India, an entity basically handovers account receivable to the finance company. The invoice discounting doesn’t have any team and condition regarding a certain amount of account receivables. And invoice factoring can cost 0.5% up to 5% in fees this calculation is against the value of account receivables, in addition, some other fees also involve originating the loan. In contrast, invoice discounting usually between 1.5% to 2.5% fees without any additional fees.

Invoice Discounting For Small Businesses

 

INVOICE DISCOUNTING is one of the simplest forms of invoice financing. It is a kind of loan in which the invoices act as the collateral. The invoices generated are mostly to be paid between the periods of 30 to 90 days by the customer; it may vary According to the policies of different companies. But when a business requires the money for its WORKING CAPITAL, this amount acts as a hindrance in the workflow of the business. This is where the role of a lender comes into play. The small businesses can forward these unpaid invoices to the financier who after analyzing the authenticity of the invoices offer a short-term loan to the business. They provide them with 70-80% of the total amount of the invoices.

A perfect example of INVOICE FINANCING:

Suppose a small business owner Manoj has invoices worth Rs 1,00,000 that are yet to be paid by the customers. Manoj forwards these invoices to lender X. After scanning the invoices the lender credits the amount of Rs 80,000 to Manoj's account and it can be used by him for further business transactions. When the customers pay their outstanding invoices they are credited directly in the account of the lender i.e. company X about which the customers are unaware of. The company X then transfers the amount to Manoj's account after deducting their fees. The amount of fees deducted varies depending upon the duration in what the customers pay back to company X, the longer the time period the higher is the fee.

INVOICE FINANCING has proved to be of great advantage for small businesses. Some of them are listed below.

Better Cash Flow

The top most advantage of INVOICE FINANCING or INVOICE DISCOUNTING is that it helps in the betterment of the cash flow of the company making it better for the company to cover up the expenses of the company.

Flexible Payment Terms.

In order to attract more customers, you can easily extend your payment terms from anywhere between 30 days to 90 days, as you do not have to worry about the lack of funds required for running the company.

Easy Eligibility And Simpler Application

The application process is also quite simple in this process of BILL DISCOUNTING, as only a few documents mainly the invoices are to be authenticated, unlike the other sources of finance which has a never-ending list of documents to be submitted and verified. It is one of the easiest ways of procuring finance which requires the least of the paperwork.

Fast Credit

Unlike other credit sources which can take weeks or even months because of its legal formalities to be fulfilled. INVOICE FINANCING is a kind of SUPPLIERFINANCE that provides credit mostly within a week once the invoices are submitted.

So next time your business gets short of funds, you can go for PRIORITY VENDOR India's Largest Online Vendor Finance Platform which provides the option of INVOICE FINANCING which is a much quicker way of obtaining credit, rather than reaching out for traditional financial institutions which might take a lot of time and a lot of paperwork.

Cash Discount Vs Credit Card Surcharges

Source: Google

The use of credit cards has become quite common these days. In fact, we ourselves must have swiped a credit card many times for purchasing any of our favorite products. They have become an easy mode of finance for buying consumer electronics and other items through e-commerce these days, all the top E-commerce websites like Flipkart, Amazon etc have an easy option of EMI for several products through credit cards. It is more common with the people working in the new age corporates and other reputable MNC's as they are providing the credit card facility complimentary to their employees. As we are getting a credit which means a kind of loan and a loan is incomplete without an interest rate charged by the bank, here the surcharge fee acts as the interest rate which is charged by the bank from the user on every transaction they make through credit cards. Simply explaining it is the extra amount which a user pays on every transaction he makes through a credit card. These charges can go up to 4 %, changing depending upon the different states and their laws.

On the other hand, merchants also follow the practice of cash discount. In this practice, the merchants add an extra service fee to all their items and if a consumer is paying in cash the merchants waive off the service charge and provide it as a discount to the customer. There are several guidelines which the merchants have to follow while using this practice; they have to make the customers aware of this policy through proper informative boards in shops. Also, the receipt that the customer gets must have the service charge mentioned and also be shown in the discount given section. It can also be called a kind invoice discounting for the customers.

Source: Google

Both the practices have their own advantages and disadvantages. CASH DISCOUNT or BILL DISCOUNTING might allure the customers because of the fact that they have to pay less for a product as a benefit of early payment to the merchant. On the other hand some people might get attracted towards the credit card purchase because they might be paying extra but not paying at that point of time, they are buying the product on a kind of short-term loan, they can buy their desired products even when they don't have the cash by paying for it in the near future. It all depends on individuals and prevailing situation some might have the availability of cash and would prefer paying less and some might not have that much cash and would love to pay the extra amount on a credit purchase. 

Supply Chain Finance And Dynamic Discounting

Almost every business in this world thinking of a long run wants to keep its suppliers happy. They very well realize the importance of contented vendors for the smooth running of a business. Cash is the most important aspect of a business but unfortunately, due to dull economic conditions and lack of cash in the market, businesses are unable to cater to the payment needs of the vendors. However, there are a few good supply chain management options available like Dynamic Discounting and Supply Chain Finance.

Supply Chain Finance- It is a method of Vendor Finance in which the buyer pays the supplier through a third party. The third party or the financier pays to the supplier on buyer's behalf. The amount which is paid to the supplier is less than the actual amount mentioned on the invoice. The financier then takes the full amount from the buyer as per the agreed terms and the difference between the amount on the invoice and the actual amount paid to supplier serves as a profit for the financier. This method is also known as Supplier Finance. Both the buyer and the supplier get the benefit from it. The buyer gets away with the burden of timely payments without affecting the smooth flow of business, on the other hand, the supplier has access to quick cash and gives them the Working Capital required for running the business.

Dynamic Discounting - It is a more flexible way of early payment in which the buyer pays the supplier using their cash. Under this method, the supplier accepts the payment from the buyer at a discounted rate. It is called dynamic because the rate of discount keeps on changing depending upon how early the buyer makes the payment. The earlier the payment is the higher is the discount rate. It is a kind of Cash Discount which the supplier gives in return for the early payment. This method is beneficial for both the parties as it helps the buyer in purchasing at a lower rate and as per the supplier's point of view it helps in smooth flow of business due to instant availability of cash.

The purpose of both Dynamic Discounting and Supply Chain Finance are almost the same but the only difference is that the discount offered in dynamic discounting is never fixed whereas the discount in Supply Chain Financing is almost fixed. Priority Vendor is one of the most trusted names in India providing Vendor Finance services to its clients. Looking at today economical conditions and lacks of cash flow in the market it is recommended for businesses to opt for Supplier Finance in order to lower their burden of timely payments.

Early Payment For Vendor Finance

Working capital is the backbone of any business. It is extremely essential for running a business and its day to day activities. But what if there is a scarcity of working capital due to a payment delay. Any business small or big can be deeply affected by it. This is why the need for early payment in India is rising every year. 

Early payment in India

Mostly big companies pay after at least 60 to 90 days from the date of invoice. Businesses cannot afford this delay. They might be unable to process their next order due to the shortage of funds. This is where supplier finance in India comes in role. It is also known as vendor finance.

Vendor finance is a simple process of invoice discounting in which a vendor or a business secures the payment from a third party or financier on behalf of its invoice. In return for this payment, the financer keeps some part of the payment as an early payment charge. It is a kind of loan which is far better than an actual bank finance. Bank finance requires a lot of formalities and paperwork, apart from all these banks also require a collateral. This is not the case in supplier finance, the invoice acts as a collateral here and helps the business in procuring a secure finance. The discount or the fee charged is about 10 times less than the other traditional financial solutions. It is a quicker process and helps the vendors in maintaining the flow if businesses. Shortage of funds does not act as a barrier for small businesses in this model.

It is also beneficial for the buyers or the businesses which the vendors are doing with as it helps in maintaining a reputation of a reliable business partner. The buyers are able to fulfill their financial obligations without using their own money.

Dynamic Discounting

                          Dynamic Discounting

This type of dynamic discounting in India has become a popular financial model in today's world proving to benefits to all the three parties involved the buyers, the sellers, and the financers. Small and medium businesses are adopting this technique because of the easy cash flow and less of paperwork. Through this technique, the buyers can extend their payment date and the supplier can get cash for the business, both at the same time. There many companies which provide vendor finance in India and many small and medium businesses are opting for their services to reap the benefits of early payment.