1. What is invoice discounting?
When a company requests for a loan by keeping its unpaid account receivables as collateral, the process refers to invoice discounting. In this type of financing, the financer can alter the amount of the debt as soon as the amount of accounts receivables, kept as collateral, changes; hence the form of the loan offered is also short term.
Also considered as debtor finance, invoice discounting eyes to benefit companies having cash flow problems, as their debtors are expected to pay invoices not before 30 to 90 days. If a company is facing problems with their financial reserves being insufficient to pay corporate expenses, allowing clients to pay in 30-90 days can affect the cash flow of the business. With invoice discounting, instead of waiting for customers to pay within the normal credit terms, companies receive the cash as soon as the invoice is issued; thereby getting an accelerated cash flow from the customers.
2. How does invoice discounting work?
- Companies provide goods and services to customers and make an invoice
- Details of invoices are sent to the financer
- Financer provides the funds based on the amount of the invoices, usually within 48 hours
- Companies gets back the balance of the invoice once the debtor pays back
3. What is the difference between bill discounting and factoring?
| Bill discounting | Factoring |
| Control of sales ledger has to be taken by the business | Control of sales ledger is taken by factor |
| Suitable for small businesses | Suitable for large businesses |
| No assignment of debit | Assignment of debit |
| Bill is discounted and paid when the transaction takes place | Maximum amount is paid in advance and the rest is paid at the time of settlement |
| Always recourse in nature | Can be recourse or non-recourse |
| Falls under negotiable instrument act, 1881 | There is no specific law for factoring |
| Parties involved: drawer, drawee, payee | Parties involved: factor, debtor, customer |
| Financier charges fees in the form of discounting charges or interest | Factor charges fees in the form of interest and commission for the services |
For more detailed information about their key differences you can visit Bill discounting vs factoring.
4. What is bill discounting?
Bill Discounting can be considered as a process of selling the bill to the third party which can be a bank or financial institution before its date of maturity, at an amount which will be less than its par value. The discount given against the bill is based on the remaining maturity time as well as the risk involved in it.
First of all the third party satisfies their firm regarding the drawer’s credibility, before advancing them with money. After knowing with the creditworthiness of the drawer, the financial institution will grant fund after deducting the relevant discounting charges or interest. When the financial institution purchases the bill for the client, it becomes the owner of the respective bills. If the client delays the payment, then he is supposed to pay interest as per prescribed rates.
Factoring is a transaction process in which the customer or borrower sells its book debts to the financial institution called factor at some particular discount. Having purchased receivables the financial institution finances, money to them after the deduction of the following:
- An appropriate margin
- Interest charges for the financial services being provided
- Commission charges for the supplementary services
Now, the customer forwards the collection of payment from its buyer to the financial institution or the customer may ask to forward the payment to the financial institution or to the factor to settle the balance dues. The factor provides the following services to the customer: Credit investigation along with debtor’s ledger maintenance, collection of debts from the buyer, credit reports on debtors and so on.
For more detailed information visit receivable factoring, reverse factoring and invoice factoring.
6. What is receivable discounting?
A receivable can be seen as a promise for future incoming value towards a business organization. This can be monetary worth as well as capital worth. It becomes important to know that it is considered as a future being defined as a value flowing to the business and it is usually not received at the point when a transaction is made. In the most basic form, it will be seen as an invoice which is submitted to the end buyer when a commodity is purchased. The reason because of which the consignments are not paid for on purchase is due to the end buyer being provided with credit days from the seller.
7. What are the key features of invoice discounting?
- Perfect alternative solution for traditional business form
- Cash flow remains unaffected as instant cash is provided over cash tied up with unpaid invoices
- Adapts with the changing business environments as they change and grow
- Companies retain control on collection of payments
