Invoice discounting is basically the same as invoice factoring: it involves selling your invoices that are not yet due to be paid to a company at a discount. The discount provides the company purchasing your invoices with their profit; but by receiving cash now for your invoices, invoice discounting enables you to: * Meet emergency expenses * Pay suppliers early to take advantage of early-payment discounts * Take on time-sensitive new projects * Expand your business more quickly * Pay for costly advertising that will bring in more sales * Beef up your business prior to crucial time points Invoice discounting involves finding a company that will purchase your accounts payable at a discount that depends on the length of your payment window. The discount generally ranges from about 1.5% to 5% for every ten days until payment is due, with the lower discount percentages going to the most creditworthy of the companies that owe you money. Your company's creditworthiness has no bearing on this sale. And with invoice discounting, you can sell part or all of any reasonably creditworthy debt. You can either sell your invoices on a notification basis which means the company that purchases your invoice also collects on it or you can work out terms with the company purchasing your invoices on a self-collect. The difference is when it's a notification sale, your debtors will pay the invoice discounting company directly. If you collect debts yourself and then forward to the invoice discounting company, your customers will never know that you sold their invoices to another company. It is easier to sell invoices on a notification basis because the invoice discounting company knows, this way they will get their money back in a timely fashion. The main advantage of selling invoices on a notification basis is that the factor, or invoice discounting company, is then responsible for collecting the debt and assumes all the credit risk. The factor is often a broker, not the company purchasing your invoices. Using invoice discounting on a regular basis to fund your company can eliminate the need for staffing a credit and collection department, which equals another saving for you. Other Ways to Use Invoice Discounting If you establish an ongoing relationship with an invoice discounting company, you can even establish the equivalent of a line of credit based on your invoices. Instead of using all the funds forwarded to you in payment for your invoice, you take what you need and leave the rest with the invoice discounting company. The discounting company allows your account to accrue interest, and you can draw on the account as you need cash. If you're not ready to sell invoices outright, you can try using accounts receivable as collateral for a loan. This involves getting a bank to accept both your credit and your debtors' credit, and then collecting cash equal to at least half and up to ninety percent of your accounts receivable. This is a little cheaper than invoice discounting, but it can also be both slower and less flexible.
