Overview of Invoice Discounting

Invoice discounting is a type of borrowing that some businesses use in order to gain access to cash when they need it. With this system, a business will work in conjunction with a finance company so that it can borrow against written invoices. 

How It Works

During this process, the company will be allowed to borrow a certain percentage of the value of an invoice from a finance company. In most cases, the client will be able to borrow about 80 or 90 percent of the value of the invoice. Then when the customer pays the invoice, the company forwards the money to the finance company. 

Benefits

The biggest benefit of using invoice discounting is that it can increase cash flow. When a company is running low on cash, it can use this system to gain access to money immediately after an invoice is written. Another benefit is that the business will have to pay interest only on the amount of money that it borrows instead of on a particular total.

Drawbacks

The biggest drawback to this system is that it is difficult to get out of this habit once you get involved. When you constantly borrow money, it can increase your costs and lower profitability.

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