How Invoice Discounting Works In India
The perfect alternative to a business loan, invoice discounting is a form of raising instant funds for your business. It creates an increase in cash with money that is already owed to the business by your customers. Invoice discounting is simple and straight forward. If you sell goods or offer services on credit, you are eligible for the service. The basic process requires you to use the invoices of your company to raise funds. The lender will pay a lump sum which is usually 70 percent of the invoice amount. This money can be used for any purpose in the business and the customer will pay on the due date. The customer will not be aware of the transaction that has taken place between you and the lender. If you do not want to wait for 30 to 90 days for the customer to make the payment, use invoice discounting. Let us take a look at the pros and cons of invoice discounting in India.
Pros of invoice discounting
If you are in immediate need of funds and do not have the time or patience to go through the process of a business loan application, you can use invoice discounting. It will give access to cash almost instantly so that you can keep the business running smoothly. It is perfect for those who need short term funds and cannot wait for weeks to get approval.
Manage cash flow
It is important to remember that invoice discounting is not a one-time thing and you can use it to manage the cash flow from time to time. You can build a relationship with the lender and continue to discount the invoices whenever you need to make payments. It can become a regular form of raising short-term funds.
When you discount the invoices, you do not have to worry about the eligibility criteria, credit score, or documents. The lender will only be concerned about the payment history of the customers. It will give them an idea of the type of risk they are taking. Even if you have a low credit score, you will enjoy quick approval.
Cons of invoice discounting
There is a fee associated with discounting and it can range anywhere between 1 to 5 percent of the invoice value. You need to keep this cost in mind and consider if it is worth the loss. If you are on a tight budget, you might want to wait for the customer to make the payment.
Liability of unpaid invoices
You need to keep in mind that the lender will not act as a collection agency and they will not put in the time to track the late-paying customers. Hence, you are the one who is responsible for paying the unpaid invoices and clearing the amount that the customers do not pay.
There is no single financial solution that works for all types of businesses. Hence, consider the pros and cons of invoice discounting in India and then make a decision.