Invoice discounting is an effective way for businesses to raise capital without having to apply for a bank loan. For many companies, the latter is the only way for them to generate cash for their business, or at least the only way that they are aware of. Many companies depend on debt in order to cover their expenses, purchase materials or fund their expansion efforts. However, borrowing money carries its own risks.

If a business is unable to repay the money that they have borrowed, they are in danger of having property repossessed or ruining their credit, both which can cause major problems. One very good alternative for some companies is invoice discounting.

Invoice discounting involves a business leveraging their outstanding invoices or receivables for cash. These are sold to a Factor, a company that specializes in such transactions. This factor will purchase the invoices for a discounted amount. This typically is in the neighbourhood of 70%-85%. Some firms will offer even higher rates.

After the invoices have been purchased, the factor will then collect the outstanding debt. All monies are returned to the original holder of the invoices (the company who sold them), though they will pay back the money they received from the purchase of the invoice back to the Factor. The Factor is then paid a certain percentage for their services plus any other pre-arranged fees.

The price that a factor is willing to pay for a company’s invoices will differ based on a number of things. The age of the invoices, the credit history of a company’s clients and their industry standing, will all affect how much a Factor charges.

One of the great things about invoice discounting is that it is not dependent on a business’ credit score. Just as an individual can have bad credit, so can a company. This also affects their ability to borrow money. In today’s economic climate, where banks are hesitant to give out loans, a business’ credit history is incredibly important. If it is average to poor, it will be very difficult for them to qualify for a bank loan.

With invoice discounting, this is not an issue. A Factor will take into account the credit score of a company’s clients. As long as it is satisfactory, a deal can be reached. This makes it possible for businesses, even with weak credit histories, to receive the money they may need to keep their business afloat.

For many companies, a bank loan is the only way for them to generate cash, aside from their sales revenue. Some businesses are not aware that alternatives exist or do not know enough about their options to make a decision regarding whether or not they may be a good fit. Invoice factoring is an excellent way for many businesses to raise cash quickly.

Not having to wait until their invoices are paid allows companies to bring money into their business without lengthy waiting periods. Sometimes, this can be the difference between whether or not a company will be able to stay in business or if they will be forced to close.