Posts tagged: single invoice discounting

What it Means to Use Single Invoice Discounting

invoice discountingWhen asked about the trickiest ball to juggle in business, most entrepreneurs would agree on financing. It’s a sensitive topic and one that’s also highly debated. After all, there isn’t a one-size fits all solution when we talk money matters. But if there’s one that has risen in use and popularity over the past years, that would be single invoice discounting. So what’s the catch?

Single invoice discounting represents a category in receivables financing that allows businesses to advance the value of a specifically chosen customer invoice thereby receiving its monetary value prior to its maturity.

What happens is the company chooses an invoice of significant value and one that fits the requirements of a pressing or urgent expense. It shall then be used as a security for the advance. The procedure takes fairly quickly with majority of providers able to release cash in a matter of only twenty-four hours. Upon receipt of the cash, the company uses it as it sees fit. Once it matures and collection has been completed, it then goes on to pay the provider for the advance taken plus a fixed predetermined fee.

The great thing about single invoice discounting is that it’s a zero liability mode of financing. This means that it comes with zero interests and there are no asset-based collateral requirements. Not surprising as the method is known to be an asset transaction. It doesn’t categorize as a debt, credit or borrowing. Instead, it is recognized as an increase in cash coupled by a decrease in trade receivables and a debit to an expense account to record the onetime fee.

Speaking of which, the fee to be paid to the provider is equivalent to a small percentage of the total invoice value which can oftentimes be around 5% or less depending on the agreement. It is also a onetime fee since single invoice discounting is a onetime transaction and does not involve lengthy contracts.

Many entrepreneurs favor the method because apart from being a zero debt option, it helps improve liquidity by freeing locked up cash within invoices. It even hastens collections, betters cash flows and strengthens working capital which is great for any business. We all know that money is the lifeblood of any organization and without it operations would not run and push through. Moreover, single invoice discounting allows businesses to better tie up their actual cash to their level of sales.

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