Published : July 9, 2024 , Updated : July 16, 2024

How to Access Invoice Discounting: Eligibility Criteria and Application Process

How to Access Invoice Discounting: Eligibility Criteria and Application Process

Is your company having trouble with cash flow? Have you heard of invoice discounting? If not, let me explain. Invoice discounting is a way to get cash quickly by selling your unpaid invoices to a lender. This helps you get the money you need right away instead of waiting for your customers to pay. It’s a great way to keep your business running smoothly and handle expenses without delays. Get to know more about it in this blog!

What is Invoice Discounting?

Invoice discounting is a way for a business to get cash quickly by selling its unpaid invoices to a bank or another company at a lower price.

The business gets most of the money from the invoice right away, while the bank or company waits and collects the full amount from the customer later. This means the business is using its unpaid invoices to get a loan, with the invoices acting as security for the loan.

Also Read: The Ultimate Guide on What is Invoice Discounting

Features and Benefits of Invoice Discounting

Invoice discounting helps businesses get money fast by using unpaid invoices. Here are its key features and benefits:

  • Quick Cash Access: You get cash quickly, usually within a few days of sending an invoice.
  • Improved Cash Flow: By getting money upfront for invoices, you can pay bills on time and manage finances better.
  • No Collateral Needed: It’s unsecured, so you don’t have to offer assets as security.
  • Flexible Financing: You can choose which invoices to use and how much money you need.
  • Confidential: It can be kept private from your customers.
  • Credit Control: Some lenders help manage your customer payments, reducing the risk of bad debts.
  • Cost-effective: It’s often cheaper than other loans because fees are lower.
  • Scalable: It works for small or big businesses, and you can adjust it as needed.

Invoice discounting is a handy way to manage cash flow and grow your business without waiting for payments.

When to Use Invoice Discounting?

Invoice discounting is great for businesses that need cash quickly. Here’s an example to explain how it works:

Imagine you run a small business and provide a service to a big client. You send them a bill for ₹10,000, but they won’t pay for 60 days. You need money now to pay your bills and employees.

With invoice discounting, you sell your bill to a company for ₹9,000. The company gives you ₹9,000 right away. When the bill is due, the company collects the full ₹10,000 from your client. This way, you get cash immediately to keep your business running smoothly.

The Parties Involved in Invoice Discounting

In invoice discounting, there are three main parties:

  • The Business (Seller): The company that needs cash quickly.
  • The Customer (Debtor): The client who owes money to the business.
  • The Financier (Factor): The company that buys the unpaid invoices and gives cash to the business.

Here’s how it works:

  • The business sells its unpaid invoices to the financier.
  • The financier gives the business cash upfront.
  • When the invoice is due, the customer pays the full amount to the financier.

Invoice discounting helps businesses get cash fast to improve cash flow. By selling unpaid invoices to a financier, businesses get money immediately and can focus on growing. It’s important to find a trustworthy financier that offers the best terms and rates for your business.

Importance of Invoice Discounting for Businesses

Invoice discounting is becoming very popular for businesses of all sizes. Here are a few reasons why:

Better Cash Flow: By selling their unpaid invoices to a third party, businesses get money right away. This helps them pay bills on time, invest in new projects, and grow their business.

Flexibility: Invoice discounting is more flexible than traditional bank loans. Businesses can choose which invoices to sell and how often, depending on their needs.

Less Risk: Unlike traditional bank loans, invoice discounting doesn’t require businesses to use their assets as collateral. This means they are not at risk of losing their assets if they can’t repay the loan.

Time-Saving: Managing accounts receivable and chasing down unpaid invoices can take a lot of time. By outsourcing this task to a third party, businesses can save time and focus on other important aspects of their business.

Overall, invoice discounting is a great option for businesses that need to improve their cash flow and manage their accounts receivable more efficiently. It’s important to research and find a trustworthy financier that offers the best terms and rates for your business.

How Invoice Discounting Works?

Here’s a simple step-by-step explanation of the invoice discounting process, using an example of a manufacturing company in India:
Step 1

The manufacturing company sells goods to a customer and sends an invoice. For example, the company sells goods worth INR 50,00,000 with payment due in 60 days.

Step 2
The company needs cash right away and doesn’t want to wait 60 days. So, it decides to use invoice discounting.

Step 3
The company sends the invoice to a financier (a third-party company) along with any required documents.

Step 4
The financier checks the invoice and the customer’s creditworthiness to make sure everything is legitimate.

Step 5
The financier gives the company an advance of 80% of the invoice value. In this case, the company gets INR 40,00,000 right away (80% of INR 50,00,000).

Step 6
When the invoice is due, the customer pays the full amount (INR 50,00,000) directly to the financier.

Step 7
The financier deducts its fee (usually around 2%) and gives the remaining amount to the company. So, if the fee is INR 1,00,000 (2% of INR 50,00,000), the company gets INR 39,00,000 after the fee is deducted.

By using invoice discounting, the manufacturing company gets INR 39,00,000 immediately instead of waiting 60 days for the full payment. This helps improve the company’s cash flow and allows it to invest in other business areas.

Eligibility Criteria for Invoice Discounting in India

To apply for invoice discounting in India, businesses need to meet certain requirements. These requirements might vary depending on the lender, but here are the common ones:

Registered in India: The business must be officially registered and operating in India.

Minimum Revenue: The business should have a minimum turnover or revenue. This amount can vary depending on the lender.

Invoicing History: The business must have a history of invoicing customers and generating accounts receivables.

Creditworthy Customers: The customers of the business should have a good credit history and are likely to pay their invoices on time.

Good Credit History: The business itself should have a good credit history and financial standing.

Financial Documents: The business may need to provide audited financial statements or other documents to show its financial position.

Invoice Information: The business needs to provide details about the invoices it wants to discount, including the customer’s name, invoice amount, and payment terms.

It’s important for businesses to research and find a lender or financier whose eligibility criteria match their needs. By meeting these criteria and choosing a reliable lender, businesses can use invoice discounting to improve their cash flow.

The Role of a Lender in Invoice Discounting

In invoice discounting, the lender (or financier) helps businesses get cash quickly by providing advances against their unpaid invoices. Here’s what the lender does:

Provides Cash Advances: The lender gives businesses a cash advance, usually around 80% of the invoice value, in exchange for the unpaid invoices.

Verifies Invoices: The lender checks the invoices to make sure they are genuine and meet their criteria.

Conducts Due Diligence: The lender examines the business and its customers to see if they are reliable and capable of paying the invoices.

Collects Payments: When the invoice is due, the lender collects the full amount from the customer.

Deducts Fees: The lender takes out a fee for their services, which includes providing the cash advance and managing the invoice collection.

Returns the Balance: After deducting the fees, the lender gives the remaining money back to the business.

By playing these roles, the lender helps businesses improve their cash flow quickly, without waiting for customers to pay. Working with a reputable lender ensures that businesses can access these benefits smoothly and efficiently.

How Much Financing Can Be Obtained Through Invoice Discounting?

The amount of money a business can get through invoice discounting depends on several things, like the lender’s rules, the business and customers’ creditworthiness, the size of the invoices, and the payment terms.

Usually, businesses can get 70% to 90% of the invoice value as a cash advance.

For example, if a manufacturing company in India has unpaid invoices worth Rs. 1,00,000 from a reliable customer, and the lender offers an 80% advance rate, the company can get Rs. 80,000 (80% of Rs. 1,00,000) immediately.

When the customer pays the invoice, the lender collects the full amount and deducts its fees before giving the remaining balance back to the company.

Lender fees can vary and may include interest charges, processing fees, and other costs. So, it’s important for businesses to review the lender’s terms and conditions carefully.

By using invoice discounting wisely with a reputable lender, businesses can improve their cash flow and get the funds they need to grow and expand.

Invoice Discounting Example

Imagine there is an Indian company called “Microchip Solutions Pvt. Ltd.” They recently delivered microchips worth Rs. 15 lakhs to a big electronics manufacturer. The payment terms are 60 days, but Microchip Solutions needs cash right now to pay their suppliers and cover their expenses.

To solve this, they decide to use invoice discounting. They contact a lender that offers this service and submit the invoice for Rs. 15 lakhs.

The lender checks the invoice and the electronics manufacturer to make sure they are reliable and can pay on time.

Once everything is approved, the lender gives Microchip Solutions an advance of 80% of the invoice value, which is Rs. 12 lakhs (80% of Rs. 15 lakhs). Microchip Solutions gets this cash immediately and uses it to pay their suppliers and cover other costs.

After 60 days, the electronics manufacturer pays the full Rs. 15 lakhs to the lender. The lender deducts their fees (usually 1% to 3% of the invoice value) and returns the remaining balance of Rs. 2.55 lakhs to Microchip Solutions.

By using invoice discounting, Microchip Solutions gets the cash they need right away without waiting 60 days. This helps them manage their cash flow, pay suppliers on time, and invest in new projects.

How to Implement Invoice Discounting in Your Organization?

Here’s how to implement invoice discounting in your organization:

Invoice Discounting Process

To start using invoice discounting, follow these steps:

  • Find a Lender: Look for a lender or financier that offers invoice discounting.
  • Submit Invoices: Give your unpaid invoices to the lender. They’ll check if your customers are reliable and can pay.
  • Get Cash Advance: If approved, the lender gives you an advance, usually 70% to 90% of the invoice amount. Use this money to pay suppliers, cover expenses, or invest in new projects.
  • Customer Payment: When your customers pay the invoice, the lender collects the full amount and takes out their fees. Then, they give you the rest.

Documents Required for Invoice Discounting

You’ll need these documents:

  • Invoices: Copies of the invoices you want to discount. Make sure these are real and for goods or services you delivered.
  • Delivery Proof: Evidence like signed delivery receipts showing you delivered what you invoiced.
  • Purchase Orders: Copies of orders from your customers, which help the lender check if your customers are trustworthy.
  • Financial Statements: Your financial records, such as balance sheets and profit statements. These show your financial health.
  • Other Documents: Depending on the lender, you might also need bank statements, tax returns, and business licenses.

By providing these documents, you help the lender see you and your customers are reliable. This increases your chances of getting invoice discounting approval and improving your cash flow.

Costs and Fees of Invoice Discounting in India

When you use invoice discounting in India, it’s important to know about the costs and fees involved. These can vary between lenders, so it’s smart to compare different options before deciding.

Here are the typical costs and fees:

Interest Rate: The lender charges interest on the cash they give you upfront. This rate depends on factors like how reliable your customers are and how long you need the financing.

Processing Fee: There’s a fee for checking your invoices and processing the cash advance. It usually ranges from 0.5% to 3% of the invoice amount.

Service Fee: This fee covers managing the invoice collection and other administrative tasks. It can be from 0.5% to 2% of the invoice amount.

Penalty Fee: If your customer doesn’t pay on time, you might face a penalty fee. This can range from 1% to 3% of the unpaid invoice amount.

Some lenders might also ask for a minimum number of invoices or a minimum turnover to qualify for invoice discounting. Be sure to ask about any hidden costs too.

Understanding these costs helps you choose a lender with the best terms for your business needs.

Conclusion

Invoice discounting offers businesses in India a valuable tool to manage cash flow effectively by leveraging unpaid invoices. By partnering with reputable lenders, businesses can access quick cash advances, improve liquidity, and maintain operational stability without waiting for customer payments. Understanding the eligibility criteria, application process, costs involved, and the role of lenders is crucial for making informed decisions. With its flexibility, scalability, and cost-effectiveness compared to traditional loans, invoice discounting proves to be a strategic financial solution for businesses looking to sustain growth and navigate financial challenges effectively.

Also Read: What are the Types of Invoice Discounting?

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