Invoice discounting can be an excellent way for some companies to infuse much needed capital into their businesses. It is quite possible to run a very successful company and still not have the money necessary to cover basic expenses such as rent, materials and salaries.
For someone who has little to no experience running a business, this may be quite surprising. However, persons who have been in the trenches, are quite aware that a company can be profitable and still be cash poor. Most companies that find themselves with not enough capital to meet their obligations, will turn to a bank in hopes of obtaining a loan. This can be a decent option in some cases but may not be available for every business. There are also some huge disadvantages to using a bank loan. We will discuss some of those below. First, we will mention what might be an excellent choice for businesses in certain industries, invoice discounting.
Invoice discounting allows a company to sell their invoices for immediate cash. Instead of waiting 60-90 days for their customers to pay their invoices, they can sell them to a factoring company, who may purchase them for 70%-90% of their value. This makes it possible to obtain the money needed to keep a business running, very quickly. A company does not have to wait weeks for a bank loan but in fact, can have a significant amount of money in their accounts in as little as one week. These monies can be used to pay employees, rent, materials, suppliers or utilities. It can also be used for future growth. Some companies are forced to turn down jobs or forgo expansion because they don’t have the money on hand to finance it. Invoice discounting provides them with the needed capital for immediate growth and to cover today’s expense.
Bank financing is the option that many business owners choose when they need to raise money for their companies. If a loan can be obtained, this money is quite reliable and this method is a pretty tried and trued. However, it is not always the best option and for some companies is not even an option at all. Banks are extremely choosy about who they give loans to. A company will need to have been in business for a certain amount of time. They must also have very good credit. A company that has average to poor credit will likely not get very far into the loan process, before they are turned away. Companies that are able to get a loan, may actually be putting themselves in a situation that isn’t necessarily advantageous. This is because a loan involves taking on new debt. This must be paid back and may weaken a company’s financial standing, making it more difficult to obtain a loan in the future or to pay their current bills.
Invoice discounting allows a company to get the money that is needed without relying on debt. Instead, they are leveraging the work that they have already completed or are contracted to complete. Invoice discounting allows businesses to be advanced this money instead of waiting for the customer to pay it.