Is Invoice Discounting a Loan?

invoice discountign“Is invoice discounting a loan?”

No. That’s as simple as it goes. But then again, answering that question with a singular word and in two characters nonetheless would prove vague and lacking. People need an explanation. They want more insight into the topic to better understand it.

That’s what we’re here for. So if invoice discounting isn’t a loan then what is it? In its simplest definition, this type of receivables financing method allows businesses to raise their needed funding in a short amount of time through their trade receivables resulting from their credit sales.

Keep in mind that sales happen either in cash or in credit. In the case of the latter, it creates invoices which are collectible from the customers to whom they are attached to. The collection period and maturity date as well as the terms and conditions of the transaction depend on the agreement between the parties involved. This means that although considered an asset, they are not available for immediate use. They can lock up cash for a significant period. There are even risks of non-collection dubbed in finance as bad debts and are recorded as losses.

What invoice discounting does is that it allows businesses to advance the value of said receivables prior to their maturity. In other words, they get to receive cash even before collection is completed or even ensues. The amount received is equivalent to the value of the invoice/s. The provider in turn gets to hold the invoice/s as security while the company continues with its operations. Once the business attains full completion from the owing customers, it goes on to pay the provider of the amount advanced plus the fixed fee agreed upon.

Invoice discounting is also praised for its speed. The method can be arranged in a significantly short amount of time, twenty-four hours being the fastest. This is only available to receivables financing methods. Additionally, its ability to hasten collections and free locked up cash within invoices help better cash flows, strengthen working capital and improve liquidity. And all that it can do without the burden of debts.

As we’ve mentioned early on in this article, invoice discounting is no loan or debt or any other form of credit and liability. It isn’t one because it is an asset transaction. The advance creates a decrease in receivables coupled by an increase in cash and a debit to an expense account for the fee.

Comments are closed.