How to Get Invoices Discounted

Poor cash flow is one of the biggest factors responsible for one in every four businesses not making it past the first year, according to FreshBooks.com. If you have been facing a cash crunch and don’t want to take a loan, bill discounting could be a good option. Bill/Invoice discounting is a service that involves the selling of bills to a financial institution before the due date at a price less than the actual value of the invoice. The difference between the actual value of the invoice and the money paid to the individual availing this service is considered to be the financial intermediary charges for the service. You can avail this service on both purchase and sales invoices

Steps to Get Your Invoice Discounted

Businesses need a steady flow of money to function uninhibited on a daily basis. However, purchase and sales transactions might not happen within the same time frame and you might run into short term debt. And even short-term debts can quickly escalate into a serious problem, at times taking you down to the point of bankruptcy. This is where invoice discounting kicks in. It offers funds against future receivables, which can then be used to take care of the working capital needs of your business. Lets us look at how it works.

Take the case of two parties, A and B, where A is the seller and B is the buyer. A delivers x units of a certain product to B and generates an invoice or bill for it. The bill here is a legal agreement that says that B has bought x units of a said product from A and he must make the payment for the same within a stipulated time period. However, A needs the money before the maturity of the agreement. Here is what A would do:

Step 1: A would approach a bank with the invoice and ask for bill discounting.

Step 2: The bank would then analyse the authenticity of the invoice and the credit worthiness of the buyer.

Step 3: The bank would then pay an amount less the par value of the invoice to A. The discount or the fee charged by the bank depends on the time left for   maturity of the agreement and the risk involved.

Step 4: Upon maturity, the bank would approach B and collect the said amount from him.

It is similar to an overdraft facility. The only difference is that you have to pay interest on the amount drawn in an overdraft facility, while you have to pay a certain fee for getting your bills discounted. This process ensures instant conversion of receivables into cash. Banks and NBFCs also offer bill discounting backed by letters of credit. A letter of credit is a legal binding much like a bill. However, it is only applicable for goods involving import and export.