Invoice Discounting: How to Secure A Business Loan Against Your Invoices

Invoice discounting is an excellent option for companies having an interest in securing a business loan. Businesses can do this using future, incoming payments or invoices. Invoice discounting is an efficient financing alternative for some companies, particularly those offering services or products for sale and bill their customers via invoices. Invoice discounting gets the payment upfront for those invoices and not wait 30 days or until they are due.

What is the Process of Invoice Discounting?

When a company decides to use invoice discounting to raise capital, they are essentially selling their invoices to a Factor.  A factoring firm will purchase them for 10% to 30% less than what they are worth. Once they take possession are the invoices, all of the company’s customers will then send their payments to the Factor.

Once the factor receives the invoices, they will return the balance of the invoices to the company that formerly owned them. They may send the balance once all of the invoices have been received or as they come in. This will be determined before the collection process.  To prevent disruption and to avoid upsetting customers and thus the relationship between the company and its clients, the payment terms or the invoices do not change.

The Factor receives payment in the form of a fee for their services. The exact amount will depend on some things. This may include when the invoices are due, and the creditworthiness of a company’s clients, as well as the experience and reputation of the Factor, amongst other things.  It is vital for any company considering discounting invoices to take special care and determine what fees to charge and under what conditions.

The invoice discounting process, at least for the company selling the invoices, goes very fast. After establishing a relationship with a Factor, they can expect to see funds in only 1 to 3 days. Compared to waiting 30-60 days, a 3-day waiting period is incredibly short. Making this a fantastic option for businesses that need money fast and have unpaid invoices. They can leverage them so that they can secure a much-needed business loan.  The process is simple, easy to qualify for (businesses only need customers with good credit) and is an effective way for companies to generate capital.

In today’s tough economic times, it has become more difficult than ever for companies to find reliable sources of capital outside of the sales that many are struggling to obtain. Bank loans are drying up. It has become more stringent than ever to convince a bank to loan them money. For some businesses, this means that they have run out of options and have no other choice but to close. Invoice discounting or invoice financing is an excellent way for companies to raise capital. As a result, they can stay afloat and perhaps even for expansion.

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