How Invoice Discounting Supports Business Growth
For a company, the immediate availability of cash is of utmost importance. It’s the lifeblood of the business and it makes things work. However, strong working capital is hard to come by for small and medium-sized businesses, as traditional lenders seek massive collateral and charge high interest rates for short-term loans.
This lack of capital impacts small business revenue and business models.
They are forced to keep huge collateral or go to private lenders for loans. This is the problem that invoice discounting can solve, especially for small and medium-sized businesses.
What is the invoice discount?
In the traditional banking system, loans are long-term and usually involve multiple collateral, which means that only companies with large-scale assets and operations can obtain loans from large lenders and banks.
The lack of large redeemable assets means small businesses will have to rely on private lenders, who charge massive interest rates, reducing the bottom line by a fair margin.
It is in this context that invoice discounting appears to be a good alternative. It offers a form of financing where sellers are prepaid by buyers, with the help of a loan company or funds from the businesses themselves.
Invoice discounting works as a short-term financing tool where a business can obtain a short-term loan from financial institutions or lenders against unpaid invoices. The finance company charges a small fee, usually around 1-3% of the invoice value. At maturity, the business is responsible for repayment to the financial institution.
This without the need for collateral, which saves cash reserves for small and medium-sized businesses. The capital saved can be used to pursue growth, plan acquisitions and fund expansion plans. Invoice discounting provides liquidity and ensures that working capital stays in the system and is used.
Advantages of invoice discounting
Invoice discounting has countless benefits, one of the most important being business expansion.
With a little extra cash on hand, businesses can invest in new tools and equipment, hire new resources, or expand to new locations.
It can help businesses expand their reach and increase their profits. Plus, it can help improve relationships with potential investors or lenders, as they’ll recognize you as serious about getting paid and managing your finances responsibly.
Not only does invoice discounting improve available cash, it also allows businesses to get paid immediately using invoices, rather than waiting for customers to pay.
This frees up funds which can be used to invest in various other areas of the business.
It helps companies have more cash on hand and offers greater risk-free returns, above those of a standard short-term investment. Invoice discounting strengthens the supply chain and makes it more resilient to disruption by enabling early payment.
Other benefits include access to working capital. It ensures unhindered operations and sustainable growth. It improves cash flow by providing the business with an advance on invoices.
A tactical advantage for sellers is that they have date and billing flexibility. Sellers can choose which invoices to finance and when they use a flexible dynamic discount system.
Invoice discounting works as an emergency fund alternative that can prove to be a lifeline for businesses
Discount on invoice: a winning strategy
Large companies can choose to put their extra cash to good use and increase their cash yields. Thus, their EBITDA returns can be maximized. It also provides the seller with quick access to receivables information, quick cash injections, low-cost unsecured financing, and other benefits that allow them to carry on business as usual. In addition, banks and other financial institutions will be able to increase credit penetration in their supply chain profitably using a relatively less risky instrument (and a high risk-adjusted return).
Essentially, the seller gets paid instantly for the goods sold, the buyer gets the full duration of the payment term, and for lenders, they can access a short-term loan and can potentially win a new customer. This makes the whole financing supply chain conundrum much easier to solve.
The emergence of digitalization has not only simplified a complicated business, but also opened up multiple avenues for supply chain finance. This allowed all stakeholders to reap the benefits. Thus allowing a win-win strategy.
The opinions expressed above are those of the author.
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