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Invoice discounting can be a great way for some companies to inject much needed capital into their businesses. It is quite possible to run a very successful company and yet not have the necessary money to meet basic expenses such as rent, materials and salaries.
For someone who has little or no experience running a business, this can be quite surprising. However, those who have been in the trenches are well aware that a company can be profitable and still be short of cash. Most companies that do not have enough capital to meet their obligations will turn to a bank in the hope of getting a loan. This can be a good option in some cases but may not be available for every business. There are also some major disadvantages of using a bank loan. We will discuss some of them below. First, we’ll mention what can be an excellent option for businesses in certain industries, invoice discounting.
Invoice discounting allows a company to sell its invoices for immediate cash. Instead of waiting 60-90 days for their customers to pay their invoices, they can sell them to a factoring company, who can buy them at 70%-90% of their value. This makes it possible to very quickly get the funds needed to keep the business going. A company does not have to wait weeks for a bank loan, but can, in fact, have a significant amount of money in their accounts within a week. This money can be used to pay employees, rent, materials, suppliers or utilities. This can also be used for future development. Some companies are forced to lay off jobs or give up on expansion because they do not have the money to finance it. Invoice discounting provides them with the capital they need for immediate growth and to cover today’s expenses.
Bank financing is the option that many business owners choose when they need to raise money for their companies. If the loan can be obtained, the money is pretty reliable and the method is pretty tried and true. However, this is not always the best option and for some companies it is not an option at all. Banks are very choosy about whom they lend to. A company will need to be in business for a certain amount of time. They must also have very good credit. A company that has average to bad credit probably won’t get very far in the loan process before they are turned away. Companies that are able to obtain loans may actually be putting themselves in a position that is not necessarily beneficial. This is because a loan involves taking on a new loan. It must be paid and can weaken the company’s financial position, making it more difficult to obtain loans in the future or pay its current bills.
Invoice discounting allows a company to obtain needed funds without relying on debt. Instead, they are taking advantage of work they have already completed or are contracted to complete. Invoice discounting allows businesses to advance this money instead of waiting for the customer to pay.
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