Invoice Discounting is Another Income Tool
By: Kathryn Lang | Posted: 26th July 2007
Money is a valuable tool in any business and invoice discounting can be one way to find that much needed capital. It is similar to factoring, in that the accounts receivable are sold to an outside company, but with invoice discounting the original owner maintains the records and customer information as well as doing the collecting of invoices in house. This means that at the end of the day the client company (or the one that is borrowing money against outstanding invoices) will be responsible for any bad debts.
The client company (again, this is the company that is selling the income of outstanding invoices) is subject to more requirements with invoice discounting than with factoring. Typically the client company will be larger (bringing in a higher yearly income than with factoring) and have to be willing to be audited. It is also important that the client company have a large number of invoices and no one customer responsible for more than 20% of the invoice balance. Diversity is important.
The client company maintains control of the consumer information with closed invoice discounting. This can be good, because the customers will never know that the invoices were sold. The bad side is that the client company will still have to put forth the man hours and effort to collect the debts. The money collected by the client company is deposited into a bank account that is controlled by the invoice buyer. This helps maintain a working honesty between the two companies. Any money that is left over is returned to the client company.
Invoice discounting is not for all companies. The expense of collection still falls on the client company, as does the hassle of making the collections. It does offer cash in advance of collection, and for that reason alone it is sometimes the best option.
Kathryn is a freelance journalist writing on business finance issues, such as invoice discounting and accounts for business.
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Tags: invoices, honesty, hassle, collections, customer information, diversity, valuable tool, borrowing money, man hours, consumer information, bad debts, yearly income, accounts receivable, business finance, freelance journalist