Here’s How Invoice Discounting Works For Small Businesses. Over the years, the financial market has introduced several innovative solutions to ease the financing hurdles of businesses seeking to grow and expand as maximum financing demand is received from this segment.
It is especially true for small businesses as they have the highest potential for growth before they reach saturation. A small business may thus require financing at set intervals to attain its long and short-term objectives.
Simultaneously, it also needs to keep the finances sorted to meet the operating funding needs that can vary from time to time. Taking into account the variation in sale receipt payments that businesses may encounter. the financial market has thus introduced invoice discounting as an innovative short-term funding option for businesses. Here, in this article, we will check out how the financing option works the best for small-scale businesses. Let’s take a look.
Here’s How Invoice Discounting Works For Small Businesses
Invoice Discounting – Meaning And Scope
Discounting on invoices is an innovative financial solution that allows businesses to raise immediate funding by leveraging unpaid invoices. It is a form of invoice financing only minus the information to invoice issuers about such arrangement.
These advances are basically short-term business loans secured by unpaid invoices whose payment is received by the lender towards loan recovery. Enterprises that carry high profit margins often resort to invoice discounting to raise the necessary funds at a short notice. It thus allows businesses to tap new opportunities and move towards rapid growth. The financing option increases the rate of cash flow in the business, thus eliminating the need to rely on credit cycles of the firm.
How Does Invoice Discounting Work?
Raising finance through the discounting of invoices follows a few simple steps, whereby the total loan availability and repayment differs from standard financing processes to a certain margin. Following are a few common steps involved in raising finance through discounting of invoices.
Step 1: Raising Invoices From Buyers
When a business initiates sales to the buyers, it raises invoices towards the payment of the requisite amounts. Such an invoice raised is used as collateral to raise funding of proportionate amount. Lenders providing financing to the business owners deduct a certain percentage towards lending charges and provide the remaining financing as loan to the business. The invoice payment so received on the due date is repaid to the lender towards loan recovery.
In this case, one must take care to offer unpaid invoice of only those sellers who are reliable and with whom they have a good history of timely payments with minimum default. Invoices from new or unreliable sellers offered for discounting may not receive approval from the lender as they bear high risks of default.
Step 2: Application For Bill Discounting With The Selected Lender
Once the business owner has selected the lending institution to avail financing through invoice discounting, he/she can proceed to apply with the selected institution for the required funds.
Today, financial institutions have simplified the application for such funding through their dedicated online portals. You only need to visit their official website and navigate to the application page to proceed.
Fill in the application form with necessary personal, business and financial details. Consequently, upload the necessary documents along with the invoices to be discounted.
Step 3: Evaluation Of The Business’s Financial Stability
Once documentation is complete, the lending institution will initiate verification and evaluation of the borrowing business through various checks and confirmations. You would need to comply with all the verification requirements to proceed. Once verified, the discounted funding value is transferred to the business loan account.
A well-documented application for invoice discounting invites hassle-free and streamlined loan processing. Post this, you would only need to ensure that the loan amount is repaid in time once the invoice payment is received. so that your creditworthiness remains high. Timely repayment of the dues would also keep the scope of future financing open with the existing lender.