Uncovering Facts Concerning Invoice Discounting

Many businesses who sell on credit often find their working capital in short supply

. To meet this shortfall they often use invoice discounting to supplement this need. This is an arrangement with a finance company which will advance a sum of money against the company's outstanding sales invoices which are used as collateral.

In an agreement with a finance company, 75% to 80% of the value of the invoices is advanced. In exchange for this, each month an interest rate must be paid on the balance due, which is often rather high. This is different from a bank loan when interest is charged each month on the original amount advanced.

It is the complete responsibility of the company to collect on these invoices. If something goes wrong and it is not paid then they are out the money. With companies who use the practice of invoice discounting on a permanent basis this can cause a problem and the financier can start refusing to accept some or all invoices. These invoices are collateral for the cash advance, the same as property can be collateral for bank loans.

There is a benefit to the company involved in that they do not run into period where there is a cash shortfall. In addition, unlike a regular bank loan, interest is only paid on what is owed. The downside is that once in this kind of arrangement, it is often difficult for a company to go elsewhere for funds. In addition, often one's reputation, if the word gets out that there is invoice discounting, reflects on how much the company is allowed, itself, to purchase on credit.

Some companies take their sales invoices and go into factoring with a lender. This means that the lender takes over the sales invoices and makes the collections. The company receives their 70% to 80% cash up front but the lender does all the collecting. In exchange, a monthly fee and interest is paid. This can be quite costly and, often, customers resent having someone else involved in the transaction.

In today's economic situation many companies are finding their working capital is in short supply. Among their assets are their sales invoices and they are aware that if they go with discounting they can keep this capital supplied with the funds needed. It should also be realized that once the company starts down this path of operation it is very difficult to change.

Whether to do invoice discounting or invoice factoring is the question many companies in today's economy are facing. It is a process that should be given careful consideration as to the obligations involved. One should carefully calculate the product being sold, the cost, the business expenses and the expected profit. Add to these regular expenses the cost of going this way to keep a cash flow and determine what is the best way to go. Many companies have been using one of these methods for years and are very happy with it but each situation should be considered separately.

by: Alex Lewis

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