Business owners adopt a variety of measures when it comes to maintaining the cash flow of small businesses or a startup. The recent Coronavirus pandemic has severely affected the global economy and the business sector. Small businesses have been hugely affected by the event of spread of the COVID-19 virus and the market has become more competitive and difficult in most industries. This is when a lot of small business owners might be considering the option of bill discounting as a form of business financing.
According to statistics, over 80% of small businesses struggle to generate and maintain enough cash flow in the first five years of operation. That being said, there are various kinds of finance options or loans available in the market for small businesses. Amongst them, a very common and popular one is bill or invoice discounting.
What Is Bill Discounting?
Bill discounting, also known as invoice discounting, is a method of working capital finance for business. A lender or a bank charges a small fee from the business to release funds before the end of the credit period. It is also known as purchase of bills as the funds are acquired before the term of expiry of the “letter of credit.” It is basically the sale of unpaid invoices to a lender who can provide the money instantly. This form of loan is primarily aimed for short-term financial assistance. It can help boost the working capital and speed up your cash flow.
How Does It Work?
For invoice discounting, the business generally sends a copy of the unpaid invoices to a lender who will then provide an agreed amount of the payment to the business. This fund can be used to cover various kinds of business expenses including rent, utilities, etc.
A lot of lenders offer invoice discounting to businesses of all kinds and sizes. They offer as much as 80 to 90% of the invoice value. Once you receive the upfront loan, you can conduct the normal collection process with the clients. Lenders generally have clear and transparent fees (ranging from 1% to 3%). Although that may vary from lender to lender and can be different under certain situations.
Is Invoice Financing A Good Option For Small Businesses?
Invoice financing can be beneficial to small businesses. Such businesses can send their invoices to the lender immediately after a work is completed. This can help them to maintain consistent cash flow throughout a certain period. Or else, you would have to wait till the end of the month or for weeks, till the invoice amount is cleared on the client’s end. This might not always be viable for a small business or startup.
The Key Benefits of Invoice Financing
It goes without saying that small businesses can definitely benefit from invoice financing. Let us take a look at the key benefits of this financing model:
- Better and more consistent cash flow to manage business expenses effectively.
- Unlike invoice factoring, invoice discounting is more confidential.
- It is a scalable funding option for small businesses.
- There is no assets collateral needed for this financing option.
- You have more control over your operations as the invoice discounting lender does not collect payments on your behalf or contact your clients either.
Final Thoughts
Last but not the least, to make the most of bill discounting, any small business will need to budget everything accurately and effectively. That can help small businesses make the most of such financing options and maintain adequate cash flow for seamless business operations.
