How does invoice discounting work? Invoice discounting or so-called invoice factoring is a process in which the business owner sells unpaid invoices to a factoring company at a discount. This ensures that no business will face sudden financial crisis at the crucial point of time.Now a question may come in your mind – why does a factoring company give discount on your unpaid invoices? The discount that the factoring company provides when purchasing your invoices is their profit. On the other hand, receiving cash instantly for your invoices helps you meet emergency expenses, launch new projects, pay for costly advertisement for brand promotion, meet employees’ demand, maintain cash transaction with suppliers to get heavy discount and expand your business.
Invoice discounting, as it name implies, involves selling your invoices for immediate cash, at a small discount. Its value proposition is very simple. Are you willing discount between 1.5% to 6% from your invoices to get paid now? Consider that many business owners offer a 2% discount to businesses that pay within 10 days. So, invoice discounting offers a similar proposition. Of course, invoice discounting (or invoice factoring as it is also called) is not for every business. It works best when your profit margins are above 15% and if you use the accelerated funds to pay for business expenses or to pursue new business opportunities.
