Invoice Discounting
What is Invoice Discounting?
An Invoice Discounting facility refers to a financing institution - or a bank - making an early payment against a trade invoice to a business in exchange for a small fee. This is typically done because, in both domestic and international business-to-business trade, companies typically have a 30, 60 or 90 day credit cycle. Which means that a supplying company or - the seller - gets paid only much later.
Having adequate working capital helps businesses expand as they can take on new market opportunities with additional funds on their hands. But conventional working capital products like Overdraft and Cash Credit Facilities provided by Banks require hard collateral and organized financial statements which might be difficult for small businesses. This is where a working capital finance solution like Invoice Discounting comes in. In Invoice Discounting a business can sell goods/services to their customers under an agreed credit period, discount them and receive funds against the invoice.
This invoice can be forwarded to a financing company such as Drip Capital which provides a collateral-free invoice discounting facility for exporters using an online platform where you can upload your invoices. Upon receiving the invoice, Drip Capital finances 80% of the invoice value within 24 hours. When the buyer makes his payment to Drip Capital after his credit period is over, it releases the remaining 20% of invoice value after deducting service and interest charges.
Why Invoice Discounting?
There are certain checks that business to undertake before concluding that they need invoice discounting sees. The most important question to ask is whether the absence of working capital will affect the growth momentum of the business. Secondly, the business should have existing banking limits and an appetite for assuming risks. If the answer to either of them is - NO- , the business should consider alternative invoice financing techniques like factoring or bill purchase
Why is it called Invoice Discounting?
The commercial invoice typically mentions the payment terms and the number of days required to make payment after the seller fulfills his/her obligation, since a pre-mature payout by the bank or the financial institution is typically associateed with a discounting feee - meaning the supplier does not get 100% of the outstanding invoice amount, it is termed as invoice discounting.
To understand this better, it'll be better to understand how Invoice Discounting Works in the first place.
Process of Invoice Discounting?
Here is how a typical invoice discounting flow is completed. A seller issues an invoice that is accepted by the buyer. The invoice mentions a payment term of 60 days, which the buyer accepts. The seller will have to give attractive payment terms to lure the buyer into sealing the deal.
Once the payment terms are accepted and the seller delivers the goods, the seller will have to wait 60 days before receiving full payment. Instead of waiting this full period, the seller can simply approach a financial institution, like Drip Capital, and either sell the invoice to them or pledge the invoice as a collateral and draw a loan for a portion of the amount. The latter is called invoice discounting
6-Reasons To Choose Flexi Payment
Choose us for our commitment to customer satisfaction, competitive interest rates, and a commitment to helping your business grow and succeed.
What is Invoice Discounting?
Is your cash tied up in your outstanding invoices? Giving credit to your customers for a longer period could hamper the regular cash flow of your business. With Tata Capital Invoice Discounting solutions, get early payments against your outstanding invoices. Purchase Invoice Discounting will save your business from the cash flow pressure while giving you some breathing space.
We help your business manage late payments and keep up with seasonal demands. By taking advantage of invoice discounting facility, you can ensure the growth your business deserves, and even perform well in periods of turbulent financial times.
Invoice Discounting is available from Tata Capital for vendors dealing with selected Corporates only which are approved by Tata Capital.
Faq’s
Frequently Asked Questions
-
Q1. What is the difference between Invoice Discounting and Invoice Factoring?
Invoice discounting is a credit feature in which the funding is raised from the submitted invoices or bills. Whereas, in case of invoice factoring an enterprise sells its accounts receivable to a third party at a discount.
-
Q2. How do you account for invoice discounting?
Ans. Invoice discounting is a process in which a third party/buyer and bank is involved in providing funding to the seller.
-
Q3. What is confidential invoice discounting?
Ans. Confidential invoice discounting is a financial feature in which customers and suppliers are not aware that the business is being advanced capital against sales invoices before the payment is received.
-
Q4. How long does it take to avail funds through invoice discounting?
Ans. It depends on the business volume and bank or lender regarding the disbursal of loan amount. Generally, it takes around 7-10 working days in the whole process.