Are you familiar with the word invoice discounting? Do you know how many types it has? To make the right choice, it’s important that you are aware of what options are available to you.
Well, invoice discounting has so many forms, and each form is designed in such a way that it fulfills your company’s unique needs, from managing your cash flow to keeping it a secret arrangement to helping your company’s growth and expansion.
In this blog, let’s get a little in-depth into understanding the types of invoice discounting.
What Is Invoice Discounting?
Invoice discounting is a financing solution for businesses to free up cash locked up in outstanding invoices. Unlike traditional invoice factoring, where the business sells its invoices to a third party, invoice discounting doesn’t let the business lose control over the sales ledger.
How Does Invoice Discounting Work?
A business can reach out to an invoice discounting provider who will provide around 80% to 90% of the invoice value to the receiver. Depending on the type of invoice discounting, any one of the parties holds the responsibility of collecting the payment from the customer. Once the customer settles the invoice, the remaining amount (minus fees) is released to the business.
Invoice discounting as a financing solution provides immediate cash to the business in case of need, which bridges the gap between invoice issuance and payment.
Types of Invoice Discounting
Following are the three main types of invoice discounting:
1. Selective Invoice Discounting
Selective invoice discounting is a type of invoice discounting where the business gets the liberty to finance their specific invoices and not the entire sales ledger. Instead of a long-term commitment, businesses have the flexibility to choose certain invoices that have either longer payment deadlines or are worth more money.
For those invoices, they get the cash right away. This type is more like getting money when you need it without entering into any sort of fixed arrangement.
2. Confidential Invoice Discounting
As the name suggests, confidential invoice discounting is a type of invoice discounting where the business can get funds against its due invoices while keeping the entire arrangement a secret from its customers. It can be different from other types of invoice discounting as the control of collecting money still lies with the business. It ultimately keeps that trust factor between the customer and the business intact.
Confidential invoice discounting is a way for businesses to get more money without telling anyone they’re getting help from a financial company. This helps businesses manage their money better.
3. Disclosed Invoice Discounting
Disclosed invoice discounting, contrary to confidential invoice discounting, is a type of invoice discounting where the business gets funds against its due invoices with knowledge about the agreement with its customers for collection and payment.
When the customer settles the invoice, the cash goes to the financing company, which deducts the fees and gives the remaining amount to the business. This type of discounting makes sure that everyone – the business, the finance company, and the customers – knows about the financing deal.
Consider These Factors When Choosing The Right Invoice Discounting
Here’s a quick list of factors to consider when choosing the right invoice discounting in the back of your mind:
1. Access Your Cash Flow Needs
Accessing your cash flow needs to see what you want from selective, whole turnover, or spot invoice discounting.
2. Credit Control
See if you want to have all the credit control by yourself or you are OK sharing it with your finance provider. If you want to keep it confidential, go for the confidential arrangement.
This factor goes without saying. Compare the cost linked with each type and see what’s the best for your profitability.
4. International Trade
For those involved in international trade, explore the advantages of export invoice discounting to manage cash flow difficulties linked to global transactions.
5. Seasonality Factor
When choosing an invoice discounting option, consider your business’ seasonality and its impact on what you choose.
Key Differences and Benefits Between Invoice Discounting & Factoring
Both invoice discounting and factoring is a financing solution where businesses can get quick funds against their unsettled invoices, which helps them improve their cash flow and manage working capital. While they both have similarities, there are differences too. Let’s get into it one-by-one:
Businesses have control over their sales ledger, credit control, and client relationships through invoice discounting.
As the financial arrangement is unknown to the customers, invoice discounting can be kept confidential.
Businesses need to make sure they get paid by their customers and keep track of money owed to them.
Based on the cash needs businesses have, they can choose which invoices to finance.
As businesses have most of the responsibility in invoice discounting, the cost is less when compared with factoring.
The financing company has control over sales ledger, credit control, and collections on behalf of the company.
Factoring in export finance gives businesses instant access to cash by paying a percentage (typically 80-90%) of the invoice value.
Factoring companies provide a safety net for businesses, protecting them from situations where customers don’t pay their bills or can’t pay.
Even the businesses with not-so-strong credit profiles can access factoring as the main focus is the customer’s credit worthiness.
Factoring offers a full financing solution that encompasses funding, credit control, and collections, allowing firms to free up time and resources.
Innovative Invoice Discounting Solutions: Credlix Empowers Business Growth
Credlix is a reliable and reputable platform in India for efficient invoice discounting solutions. It enables businesses to have quick funds with minimal paperwork and zero collateral. The services are especially tailored for small-scale industries and businesses, assisting in their expansion and working capital needs. Credlix helps enterprises innovate and optimize their supply chain operations.
To conclude, understanding the different types of invoice discounting plays a major role in optimizing a company’s cash flow and other major operations associated with it, directly or indirectly. Whether it’s selective, confidential, or disclosed invoice discounting, each option offers unique benefits to meet specific business needs.
Credlix stands out as a trusted platform offering innovative invoice discounting solutions, empowering businesses to grow and thrive in today’s competitive landscape.