Receivables discounting is a financing method that allows a business to get money against its unpaid invoices before customers actually pay them. A bank or financial institution provides funds based on eligible receivables, usually after deducting a financing charge.
It helps businesses improve cash flow without waiting for customers to complete their payment cycle. The business can use the funds to pay suppliers, manage daily expenses, or support new orders.
How It Works:
- The business generates invoices.
- Receivables are sold to a financial institution.
- Funds are received upfront at a discounted value.
- The lender collects payment from customers.
Benefits:
- Accelerates cash conversion cycle by monetizing receivables
- Enhances liquidity without increasing traditional debt exposure
- Optimizes working capital management
- Supports scalable growth by ensuring steady cash inflows
Example:
A company has a Rs 10 lakh invoice due in 60 days. Through receivables discounting, it receives funds against the invoice now and settles the financing when the customer makes the payment.