Sometimes the cost of doing business involves playing the waiting game. This can be a challenging game for companies to play if they need to get their hands on some cash fast. Giving your customers time to pay their bills can make their lives a whole lot easier and may be the only way they can afford to make purchases from you.
While it’s understandable why your customers may need to wait on their cash flow to pick up to pay their bills, your business may have the same need. Two potential solutions to cash flow problems caused by waiting for invoices to be paid are bill discounting and invoice discounting. Let’s look at how these two processes vary, how much they cost, and the benefits and downsides of each solution.
What is bill discounting?
Let’s start with bill discounting. Bill discounting offers a solution to unpaid invoices that are scheduled to be paid in the future. Essentially, the process of bill discounting entails selling unpaid invoices to a financier who will then pursue payment. When the company sells their unpaid invoices to a financier, they do so by offering them a discount. The point of doing this is to gain access to short-term financial assistance. This can be really helpful if your company is in need of working capital and wants to speed up your cash flow.
Let’s look at a bill discounting example. If Business A sold $100,000 worth of goods to Business B on credit, Business B will be issued an invoice they will have to pay at some point. If Business A is confident that Business B will pay their invoice but needs to access the cash from that sale sooner, they can sell that invoice to a company that provides bill discounting services. If Company A agrees to give a 15% discount to the bill discounting provider, they will be given $97,500. How much a company will have to pay varies greatly depending on factors like the businesses’ financial history, the applicant’s credit score, and how stable the business is.
While bill discounting will lead to earning less, which can be frustrating, if a business really needs cash to fund a business expenditure, order more inventory, or pay their employees, they may find bill discounting is worth the slight loss. These are a few of the benefits of bill discounting.
- Keep cash flowing
- Gain fast access to cash in as little as 24 hours
- No collateral required
- Bill discounting is not a loan, and no debt is incurred
- The balance sheet is not impacted as this is an off-the-book process
What is invoice discounting?
Up next is invoice discounting. It’s very easy to confuse bill discounting and invoice discounting since the terms sound so similar and help solve the same problem, but these are two very different processes. This is primarily because invoice discounting uses unpaid invoices to act as collateral for a loan.
These loans are relatively short-term because the company can pay them back as soon as the invoice is paid. After going through invoice discounting, the company will receive a loan that is smaller than the amount of the outstanding invoices (usually 80% or any invoices that are less than 90 days old). Generally, the company financing the loan gives out loans based on the total percentage of invoices owed in order to spread out their liability. That way even if all the invoices aren’t paid, the company taking out the loan can still pay back their debt.
Similar to bill discounting, invoice discounting provides a solution for companies looking to speed up their cash flow while they wait for their customers to pay their invoices. The company financing the invoice discounting generally charges interest on the loan and a monthly fee.
Invoice discounting is typically a better fit for companies that have high profit margins that can help them cover the interest payments associated with invoice discounting. If a business has low profit margins, they may find this type of financing makes it hard for them to earn a profit. Typically, businesses pursue invoice discounting as a last resort because facing both interest payments and fees isn’t super appealing, and many only turn to invoice discounting if they can’t secure another form of financing.
Before we compare and contrast the differences between bill discounting and invoice discounting, let’s take a quick look at what invoice factoring is as many businesses consider this financing solution when they need to gain access to cash flow quickly. Invoice factoring and invoice discounting are two different processes, despite their very similar names. Invoice factoring is a type of invoice financing that allows companies to sell their unpaid invoices to a factoring company. The factoring company then pursues payment directly from the customers who owe the business money.
Even though both bill discounting and factoring provide similar short-term financing solutions, bill discounting acts as an advance of sorts against a bill owed. Invoice factoring on the other hand, involves the outright purchase of trade debt.
You may lose quite a bit of cash when utilizing invoice factoring, at a rate of about 60% to 95% of the total invoice value. Invoice factoring may be a better option for companies whose clients are overdue on their invoice payments and who don’t have time to track down late payments.
The difference between bill and invoice discounting
Not sure whether bill discounting or invoicing is a better fit for your business? Let’s take a look at how the two options compare.
Both bill discounting and invoice discounting serve a similar purpose for businesses. Each of these options give businesses a way to get their hands on the funds they’re waiting for after issuing invoices to their customers.
There are some key differences between these two financing options. Invoice discounting is a loan, whereas bill discounting acts as a bill of exchange. When you pursue invoice discounting, you can only do so for unpaid invoices that will be paid in 90 days, whereas bill discounting offers more flexibility and can work for bills due anywhere from 30 to 120 days.
No matter what financing option a company pursues, they’ll want to make sure they shop around to see which financing companies can offer them the lowest interest rates and fees. This is an important step that can help save businesses a lot of money.
How Fundbox Can Help
While both bill discounting and invoice discounting can provide solutions for business owners that need cash fast, neither of these options may be the best option for your business. If you’re looking for ongoing flexible financing options, a revolving line of credit may be a better fit for your business. A business line of credit can help businesses cover more than just slow or late invoice payments and can step in when sales are slow or unplanned expenses arise. Having access to a business line of credit can make it easier to get through a rough patch—and can be what helps your business survive.
Fundbox offers a business line of credit that you can pay back in equal installments over the course of a 12 or 24 week plan. You won’t face any penalties for repaying early and each time you make a payment, your available credit replenishes, giving you ongoing access to funds should you need them.