Money is the lifeblood by which businesses run. Sure there are other factors needed to put things into play, labor for instance, but we could all agree that finances play a pivotal role in setting any entrepreneurial endeavor. This is why owners have to be smart when it comes to choosing the financing options to be used for every situation. Let’s get into those choices starting off with single invoice discounting.
Single invoice discounting is simply the act of advancing the value of a specific trade receivable, often with a significant value, and receiving the cash prior to its maturity and before collections is completed. The invoice in this situation shall be used as a form of security by the provider. After the invoice matures and cash has been collected against it by the company, it shall then repay the provider for the amount advanced plus the fees.
There are a lot of situations for which entrepreneurs find the method handy. Here are just some of them.
- When Credit Isn’t Practical or Possible – It is important to take note that single invoice discounting is not a loan or any other form of liability. In fact it does not even involve property collateral for that matter or interest. This makes it the perfect choice for entities that cannot afford to take on a debt or who find it impractical and expensive. It’s also great for startups and small enterprises who do not yet have ample assets to be garnered a mortgage or bank loan.
- When Time is of the Essence – The method is rather fast compared to other financing options. Many providers can facilitate the process and release cash within 24 hours thus enabling companies in need of immediate funds a means to provide for their needs, for example emergency expenditures or sudden opportunities. It is also because of this that the cash flows experience a quick injection allowing for better liquidity and stronger working capital.
- When a Receivable is Too Valuable – Sometimes, a receivable or invoice is so significantly valued that the longer it remains as is, the higher the threats to liquidity and the higher the risk of bad debts. Plus, it’s never attractive for companies to have massive amounts of outstanding receivables. It’s too risky and it traps a massive amount of cash within the invoice leaving it unavailable for use either in operations or for reinvestment purposes. Single invoice discounting helps avoid these situations.