Invoice discounting is on the rise in the manufacturing industry, with firms opting out of traditional methods of invoicing. There are many benefits to adopting this form of invoicing so it’s no surprise that manufacturing firms are switching to this method. Invoice discounting can be seen as short term borrowing as manufacturing firms use unpaid accounts as collateral for loans issued by finance companies. Usually, the loans issued by finance companies are less than the invoice amount and the invoices used are usually less than 90 days old.
There are many benefits to invoice discounting. Most manufacturers opt for this method because it accelerates the cash flow of the business. This means that firms receive cash as soon as they issue out an invoice. This method typically works better for companies with high profit margins as these companies are able to cover the high interest rates associated with this type of financing. The finance company earns money from their interest rate and their monthly fee in which they charge to maintain this type of arrangement. Unlike most loans, invoice discounting allows you to choose whether you want the arrangement to be on a disclosed or confidential basis. Typically, most invoice discounting is done on a disclosed basis because it would make the lender more comfortable to give you this option.
There are a few differences between confidential and disclosed invoice discounting. Firstly, confidential invoice discounting is more expensive because of the administration fees. Secondly, with disclosed invoice discounting, your customers will pay the finance company directly but with confidential invoice discounting customers will pay into an account in your name. Lastly, disclosed invoice discounting could affect the relationship you have with your customers. As mentioned previously, with disclosed invoice discounting your customers have to pay the finance company directly. Customers might change their opinion of the business if they find out that the business is using a finance provider.