When it comes to raising funds and capital for businesses, a lot of options can come to mind. One of the popular options that many entrepreneurs consider is a receivables financing kind called discounting. Such is a method by which companies like Working Capital Partners get to receive in advance the value of their uncollected receivables before payment is actually made by the owing customer. In here, the transaction is closely akin to that of a loan in the sense that the customer invoices are used as collateral. This reason in particular is the cause why a lot of invoice discounting companies have come aboard the said industry.
Let’s explain the process a little further. Now although discounting is said to be akin to a loan it still does not provide the exact same effects. One notable difference is the absence of any interest. What happens when you subject your receivables as collateral is that you get to receive their value at an early point. The amount you get to receive is relatively proportionate or discounted towards the invoice amount. You then go on your usual business and collect from your owing customers. Once you have already collected from the said customers you will then have to repay the advance that the service provider plus any agreed upon fixed fee.
What are its perks?
- It provides a quick injection of cash. No more waiting as you do with bank loans. You can get the needed funds real quick!
- It also improves cash flows as it converts and frees up any locked up cash from your customer invoices.
- It does not affect the liabilities portion of the balance sheet making way for more attractive financial statements.
- It does not involve any compounded interests. The fees or discounts to be paid are fixed and agreed upon beforehand.
- With the above said, it is less costly when compared to other financing means such as loans.
Are there any downsides to it?
Well for one it can reduce the value of your receivables as opposed to when you choose to wait for your customers to pay. However, such decrease is relatively low and most companies will in fact forego such disadvantage since they find more benefits to it. After all, in business everything comes with a price. You just have to make sure that the benefits will always outweigh the costs.
So if you feel that this financing method is for you then better search for available invoice discounting companies. Inquire and study your options well.