The pandemic has well and truly disrupted the economy as we knew before. With the world bracing an economic loss of at least $1 trillion, companies can now feel the impact reverberating across sectors.

The effect will result in a financial slowdown, and while some businesses might weather the storm with investments to sail through this tough time, others won’t be so lucky. SMEs especially are going to find it challenging to keep their accounts running, and it will require some smart (and indeed, necessary) executive moves to stay afloat at the very least.

I Run an SME – What Can I do at This Time?

If you’re an SME that’s relatively on the survival stage with no access to investor backing and are working on low cash reserves, it can be daunting to wonder where your next working capital will come from.

While governments are providing economic packages and reforms that work in favor of SMEs financially, it’s still a long draw. Having to wait for banks and other financial bodies to sort out any short- to mid-term loans isn’t a feasible prospect. This is because the process is super time consuming and let’s be honest, you wouldn’t fancy constantly visiting a bank back and forth during an already stressful period, right?

Let’s assume before the pandemic; your business was doing well. You had completed a couple of great projects with big clients, and considering how they work, you probably had a 60 to a 90-day agreement for the invoice to be cleared. Now, you’re in a fix because while that money will come into your account, you spent from your pocket to procure the resources in advance.

How are you going to manage the cash flow until the client’s invoice clears? If that’s your worry, we’ve got two words for you – invoice discounting. 

What is Invoice Discounting?

Also known as bill discounting, this is a model of short-term borrowing. The process is a boon for companies going through a similar situation like yours. It works as a sort of “alternative funding,” where you can borrow or draw money against your impending sales invoices before your client pays.

In simpler terms, you can cover your impending invoice revenue until it hits your bank account and utilize the money to keep your company afloat.

How Does it Work?

Most invoice discounting companies will lend you up to 95% of the invoice value. Unlike a regular bank, the monetary transaction happens as early as 2-4days. This is the biggest advantage invoice discounting companies can provide you, and especially during these trying financial times, it’s probably the best option you have.

Now, before we tell you the step-by-step process of how bill discounting works, there are a few pointers to remember –

  • This type of financial arrangement is ideal if you run a business that’s growing at a rapid pace. Companies borrow money for growth, but considering the CoViD-19 case, invoice discounting companies will be open to lending to fund operational costs.
  •  If your profit margins are high, you’ll be able to return the payment to the invoice discounting company and afford the general 1%-3% interest rate they charge.
  • It is impossible to apply or sanction an invoice discounting loan if your company is backed by another lender (which, in most cases, are investors) who has a blanket title to the assets as their collateral. They will have to waive their rights to the collateral till you pay back the bill discounting company.

With these pointers in mind, here’s how a typical invoice discounting process works.

  • You continue business as usual, transacting with your client.
  • You raise the invoice for sales and send them for the payment process. In this case, let’s assume you’ve agreed the client will pay you back in 90 days.
  • You hand over the invoice slip as proof to the invoice discounting company. They will lend you up to 90% of the value of the raised invoices.
  • You use this money now to manage your operational costs for the time being.
  • After 90 days, your customers pay you the amount in the invoice (chase them if needed)
  • Once they pay, you repay the loan you took from the invoice discounting company, with the interest rate they’ve charged.

Sometimes, the client will directly pay into a trust account you can set up in your business’ name, controlled by the invoice company. It facilitates easier payment and ensures a reduction in the risk of non-payment.

Perfect. But, is it Confidential?

Yes. It is.

At all points during the invoice discounting procedure, you remain the chief credit controlling body. There is another term known as invoice factoring, which by definition, works similarly to invoice discounting, but there, the lender gets full control of credit against the invoices. In simpler words, the lender is responsible for recovering their loaned amount from the client, but at the same time, it opens doors for non-confidentiality.

In the invoice discounting method, you can sign an NDA with the lender, which means competitors will not know about the application, AND you’re responsible for recovering the invoices from your clients.

Sounds Good, I’m Keen to Try This Out! How Do I Get Started?

Consider FinGurus as your reliable partner to help you get started with this form of alternative funding. We can streamline your entire bureaucratic process with our services and be the only expert advisory you’ll need to sail through the invoice discounting game.

Rely on our mediatorship skills to help procure the best companies for your bill discounting requirements. Reach out to us to expedite and ease the entire process for you.

Click here to get started.