Invoice Discounting

  • Kundan
  • Jan. 5, 2022, noon
  • Discounting

Up next is invoice discounting. It’s very easy to confuse bill discounting and invoice discounting since the terms sound so similar and help solve the same problem, but these are two very different processes. This is primarily because invoice discounting uses unpaid invoices to act as collateral for a loan. These loans are relatively short-term because the company can pay them back as soon as the invoice is paid. After going through invoice discounting, the company will receive a loan that is smaller than the amount of the outstanding invoices (usually 80% or any invoices that are less than 90 days old). Generally, the company financing the loan gives out loans based on the total percentage of invoices owed in order to spread out their liability. That way even if all the invoices aren’t paid, the company taking out the loan can still pay back their debt. Similar to bill discounting, invoice discounting provides a solution for companies looking to speed up their cash flow while they wait for their customers to pay their invoices. The company financing the invoice discounting generally charges interest on the loan and a monthly fee. Invoice discounting is typically a better fit for companies that have high profit margins that can help them cover the interest payments associated with invoice discounting. If a business has low profit margins, they may find this type of financing makes it hard for them to earn a profit. Typically, businesses pursue invoice discounting as a last resort because facing both interest payments and fees isn’t super appealing, and many only turn to invoice discounting if they can’t secure another form of financing.