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Invoice Discounting

What is Invoice Discounting?

In simplest terms, an Invoice Discounter is anyone who transacts business for someone else. Invoice Discounting (also known as debtor finance, cash flow finance or factoring ) has been a major component of business capital raising since the 1700s. Since then it has survived economic booms, recessions, and depressions. Nowadays, businesses often have misconceptions about, or overlook completely, how they can benefit from factoring. One of these misunderstandings is that only a financially weak company would use Invoice Discounting for their book debts.

While that occasionally happens, Invoice Discounting is more often than not done by companies who are focused on growth. These are the businesses that need improved cash flow so that they can receive discounts from suppliers, prepare their inventory for peak seasons, upgrade equipment, and produce and sell more goods or services.

Traditionally, a debtor who takes a long time to pay an invoice causes the business to lose money due to financing, staff, and overdraft. Invoice Discounting can be a solution to this issue. Customers can use Invoice Discounting on their accounts receivable in order to avoid incurring debt. When they do this they do not borrow money. The book debts of a company are bought by the Invoice Discounting company. The Invoice Discounting company receives a discount. The other company gets the cash from the selling of the accounts receivable. This allows them to be paid quickly and avoid the problems of a lengthy invoice.

Invoice Discounting can be beneficial to any company that operates using accounts receivables, whether they are a wholesaler, manufacturer, distributor, or in the service industry. Companies that are new, have a negative net worth, or are growth oriented will be helped the most by Invoice Discounting. This is because the cash from it can end losses from operating, allow prompt payment of creditors, or be used to increase sales and production.

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Business Challenges

Recession. Cash flow crisis. Small business bankruptcies. Interest hikes. Words and phrases like these are common in the current economic environment. Now is a stressful time for a business owner. Cash flow is negatively affected by these trends. It is also hurt, no matter the companies size, by restrictive lending policies, slow payments from debtors, and the payment pressures from creditors.

When cash flow is unable to provide for growth, business owners struggle to raise working capital. One choice is to turn to a bank, but financial institutions are only willing to lend against the security found in a bricks and mortar. Another possible solution is to take on a partner who will bring capital in exchange for equity and partial control of the business.

If neither of these options is appealing, or possible, Invoice Discounting can be used to convert credit sales into cash and provide a business with instant capital.

Invoice Discounting can Be the Answer to These Situations;

Cash flow that is unpredictable.
Low paying debtors.
Inability to collect debts due to staffing limitations.
Unable to meet lending criteria from banks.
Insufficient cash flow.
Unable to fulfill large orders due to poor cash flow.
Lending limits reached.
Overhead is high.
Accounts receivable takes up too much of management's time.
Poor management strategies for accounts receivable.
Unwilling to take on more debt.
Unable to invest in new equipment because of low cash flow.
Low cash flow makes supplier discounts out of reach.
Lack of credit checking procedures.

Who Benefits from Invoice Discounting

Growth Oriented Companies - The additional cash from factoring can boost profits, allow production expansion, or increase the number of clients.

Companies Unable to Secure Bank Financing - Factoring focuses on the ability of the debtors to pay rather than the factors that banks judge on. Neither company assets nor the owner's ability to repay a loan need to be evaluated for factoring financing.

Companies with Tax Problems - If immediate cash is needed to make tax payments, factoring can be used.

Companies Needing Additional Capital - Additional capital can be obtained quickly by using factoring.

Factoring Benefits

Sales and Production Increases - The additional cash flow that Invoice Discounting provides can be invested into the company so that it may take on larger orders and purchase any equipment needed for expansion. This increased production can lead to more profits for the company.

Purchasing Power Increased - Bulk purchasers often get discounts that smaller companies cannot normally qualify for. The capital gained from factoring can be used for large orders that will allow the company to get supplier discounts.

Credit Rating Improvement - A strong credit rating can be a benefit of factoring. The company can pay its bills in a timely manner and make larger purchases without needed to rely on debt.

Click here to contact us about invoice discounting in Perth, Sydney, Melbourne, Brisbane, Adelaide and Canberra!

How Invoice Discounting Works

You sell your book debt to the invoice discounting company for cash which can be deposited directly into your bank account. This action is completed whenever you deliver goods or complete services. Reports will allow you to stay current on debtor status. Factoring has some advantages over other types of financing.

With Other Types of Financing:

Your flexibility is limited.
You have to borrow money.
Monthly payment obligations need to be met.
Additional funds can't be secured unless you renegotiate your loan.

With Factoring:

You have no monthly payments to worry about.
No debt is incurred.
Your cash flow increases.
Your credit can improve.
You can get your funds quickly without needing to wait for approval.
You have control over how much you factor.

Cost Effectiveness of Invoice Discounting
Invoice Discounting can be a cost effective means of financing. One reason is that each client will have the program designed for their particular cash flow needs. Another thing that keeps the cost down is the tax deductible nature of factoring. Finally, many businesses that factor use the cash to get extra savings from supplier discounts.

Here are some reasons why factoring is cost effective:
Up to 80% of each invoice may be factored.
No need to have security in the form of real estate.
Money from reserves can be in your bank account in 24 hours.
Most factoring agreements are yearly.
There may be no maximum amount and the minimum could be as low as $20,000.
The application determines the cost.
There are no hidden charges or extra fees. Factors have a specific fee structure and might be a one off establishment fee.
Keep track of all the received payments with records from the factors.

Types of Businesses that Use Invoice Discounting

Any size company, from the small to the mega corporation, use Invoice Discounting.
Start-ups use Invoice Discounting.
Companies whose growth is rapid benefit from Invoice Discounting.
Businesses which do not qualify for bank loans may turn to Invoice Discounting.
Companies that have trouble collecting from their debtors utilise Invoice Discounting.

Getting Cash from Outstanding Invoices

Waiting ninety days or more for outstanding invoices to be paid can have a negative impact on a business' cash flow. Customers often delay paying invoices because it is a source of no interest financing for them. If you can't get them to pay in a timely manner, Invoice Discounting these debts would give you the cash flow you need for your business.

What Do Businesses Need to Qualify for Invoice Discounting

Each factor will have different requirements, but the main thing a factor looks at is if the debtors ledger carries too much commercial risk. Here are some of the things they will consider when making the judgement.

Your ledger should be comprised of a variety of customers. Ideally, one customer shouldn't be more than 20% of the total invoices owed.
The invoices on the ledger should be undisputed. The customers need to be able to confirm that the invoice is as stated.
The invoices should be current and not older than 90 days.
Your company makes a minimum of $100,000 in sales on an annual basis.
Only a minimum number of sales would involve progress payments, long-term contracts, retentions, or consignments.
Credit history should be clear.
Excluding some progress payments, invoices should be for fully completed services or delivered goods.
Your business is not in a high risk industry.
Other qualifications will be based on your business.

How It Will Look to Customers

Customers do not need to know that you use Invoice Discounting. The only thing that changes on their end is that they make their invoice payments to the factor rather than to your company. With the accounting done by a third party, your personnel can focus on the customer's other needs.

Costs of Invoice Discounting

Invoice Discounting provides both competitive financing and the administrative service of managing collections. The financing can provide up to 80% of the invoices value, with the remainder being paid after the customer pays the invoice.

The two main fees of Invoice Discounting are the discount charge and the administration fee. The discount charge is similar to overdraft interest. This is based on the funds drawn and is calculated daily. The administration fee covers the cost of the collections management. This fee depends on the type and size of transaction and typically ranges between 0.5%-5.0% of the value of the invoices that are being factored.

The administration service covers issuing the customers monthly invoices and doing the necessary follow up, such as phone calls or letters. In addition, regular computerised reports are submitted to your company which keep you up-to-date on account status. Having invoice administration handled by a factor can save your company time and labour.
Customer Credit Checks

Another way Invoice Discounting can help your company is with credit checking. To reduce bad debts, the credit rating of customers will be checked before the sale takes place.

Reduce Administration Costs.

Outsourcing the collecting of invoice payments can reduce a company's costs. An Invoice Discounting company can take care of checking a customer's credit, postage, record keeping, and debt collection. Depending on your business, the administration fee might be less than the cost of doing all of these tasks on your own and may allow you to save.

Do Away With Settlement Discounts

In order to get a customer to pay the invoice in a timely fashion, some companies offer discounts. The need for prompt payment is eliminated when Invoice Discounting is used because you are able to get cash quickly. In most cases this payment can be made in as little as 24 hours.

Promote Business Growth with a Healthy Cash Flow

People who take advantage of Invoice Discounting can:

Increase profits by increasing production.
Buy in bulk and receive supplier discounts, thus using the cash flow to save money.
Get financing without meeting the stringent lending criteria of banks.
Take larger contracts thanks to the healthy cash flow.
Get quick payments from debtor invoices without having to offer a discount.
Eliminate the strain that customers' debts and late payments have on the cash flow of the business.
Use flexible financing in a way that best benefits their business and looks to future growth.

Having a healthy cash flow is important for a strong business. A Invoice Discounting company gives your business a choice in financing and can help you in all of the ways listed above. A factoring business can offer financing suited to your needs along with professional services that allow you to focus on your core business.

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