Quite often businesses fail to sustain their position due to excessive outstanding invoices. In such situations, many large businesses are force to take heavy loans to run their everyday operations. Which in turn adds to their list of debts and increases the chances of closure of their business. On the other hand, small businesses even do not stand a chance of survival. If their invoices mount beyond certain months as they need timely payments against their products and services in order to keep themselves afloat. This is exactly where the option of bill discounting can prove to be of immense help to both small and large-scale business owners.
In this incredible mode of raising funds. The business owners arrange the required funds from a financial institution against a bill of exchange issued to the buyer. In other words, the lender buys the issue bills from you and makes a payment against them. And later on he collects the payments from the debtor to whom the bill was issue. Also, the lender approaches the debtor on the date mentioned on the bill by the seller/business owner. However, you must keep this mind that before offering you the finance. The lender carefully examines the creditworthiness of debtor who is suppose to make the payments in order to avoid any loss later on.
Eligibility criteria for getting the bills discounted
Whether you are a large corporate or a small and medium-sized firm. Any business can choose for bill financing but will have to align with certain regulatory requirements. In invoice discounting, the lender majorly takes over the several risks associated with outstanding debts. And hence, he/she demands assurance regarding the timely payments of the bills. Here is a list of various conditions that almost every lender requires the buyers to meet in order to raise the funds.
- All the three parties including the seller, lender. And the customer must sign a written contract stating the details of the agreement.
- The business should have an excellent credit score. And should be at least 10 months old in order to qualify for this financing process.
- To reflect profitability, it is important for the business to have dealt with minimum 2 large scale corporates.
- There should be a purchase made by the concern customer against the order mention in the bill of exchange.
- The business owner should have timely deliver the goods to the customer. And there should be no issue regarding products and services offered to the customer.
- A date must be fix by the seller on which the customer will pay the outstanding payment.
Few ways in which discounting the bills can be beneficial for your business
It is quite common for every business to receive late payments. However, it often affects the production cycle, inventory and new orders, leading to a great financial loss. Also, the delay in orders may pester the customers and affect your good relations with them. Getting the bill discounted is a smart way to deal with these issues. And help the business survive in the tough competition. In fact, here are some detailed advantages of getting the bills discount that you must know about.
- Quick access to funds in case of emergency – One of the noteworthy benefits of bill discounting is that it allows the business owners. To gain a quick access to the funds which usually does not happen in other forms of financing. As soon as an invoice gets issue, the business owner gets the freedom to use the require cash. For managing expansion projects, funding the next projects, support the working capital and for restoring the stability in the everyday operations.
- No need for collateral – When it comes to bill or invoice discounting. The lenders do not ask the business owners to pledge any asset to raise the funds. And this proves to be highly beneficial, especially for small business owners who cannot afford to provide any asset. However, a minimal amount of fee gets deduct from invoice payable, and it is the only cost that you have to bear.
- Hassle-free processing – Once you submit all the necessary documents required for the verification, the lenders do not take much time to approve your request and the funds are quickly transferred in your account. In this manner, the business owners do not have to run after the lenders at every step of the approval procedure and can continue with their business operations.
- Low interest rates – Regardless of the loan option you choose, the interest rate adds to the overall cost of borrowing and hence, you need to avail the financing services at the lowest rate possible. The bills have discount at an interest rate lower than what you receive in other form of raising funds and this makes them highly preferable.
- Reduced collection period – The whole time taken from delivering the goods to generating the invoices, waiting for reimbursement and then for payment to get transferred into liquid cash, often forces a business to let go of various golden growth opportunities. Invoice discounting cuts down this collection period and immediately provides the needed cash to the buyer.
How the process of bill/invoice discounting works?
- The seller delivers the goods to the buyer along with a bill of exchange.
- The buyer then accepts the bills and acknowledges the fact that the payment is due after a certain credit period.
- After this, the seller approaches a lending institution to discount the bill of exchange. Before approving the bills, the lender examines the creditworthiness of the buyer to assess his repayment capacity.
- Once the lender gets satisfy with the documents, he then transfers the funds in the seller’s account after deducting some amount of fee.
- Lastly, at the due date, the lender collects the payment from the buyer.
How to select the most reliable lender?
Since the markets are getting flood with those who claim to offer incredible services, it becomes important to compare a few top lenders and do a detailed background check to know more about their reputation and the quality of their services. The comparison drawn by you will also help you lock the best deal for yourself. So, while selecting a lender, here are the points that you must keep in mind.
- Lender’s contact with the client – It is necessary for you to make sure that the lender does not stress your client with constant reminders as it will only harm your reputation and good relations with your client. To avoid these situations, it is better to include this point in the pre-agreement terms and only then, proceed with the lender.
- Time required to discount the bills – Another factor that you should consider is the total time the lender will take to disburse the funds in your account. Whether the lender will take few hours, a day or few days, you must gain proper clarity about this point.
- Familiarity with your industry – You must approach that lender who is familiar with how your industry works as only someone with an experience dealing with your industry will be able to understand the complications that result in delay of payments.
To wrap up, bill discounting provides a quick and hassle-free mode of aiding the business with the required amount of finance. What makes it highly preferable is that it creates a win-win situation for all the parties – the buyer, the client and the lending institution, involved in the process. However, you must consider the points mentioned above while selecting any lender in order to make an informed decision.
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