Invoice Discounting

2007-03-08 10:33:40

( Financial )



Invoice Discounting
Invoice discounting is a form of invoice finance. Invoice finance refers to practices that revolve around receiving and giving payments evidenced by invoices. Invoice discounting is the practice of negotiating invoices at less than their face value. Negotiation is a legal term which means to transfer ownership of a negotiable document, and the rights attaching to it, to another person.

How Invoices Work
Let us imagine that you are a producer of soft drinks. You make a delivery to a supermarket, which gives you an invoice evidencing the right to payment, payable in thirty days. The problem with having to wait for thirty days for payment is that your cash flow may be severely impaired if you cannot receive money to continue your operations. One option available to you, to keep the cash flow of your business steady, is invoice discounting.

How Invoice Discounting Works
Let us return to our example. You now have an invoice evidencing right to payment of, let's say, two thousand dollars. An invoice is a negotiable instrument, meaning it can be transferred to others. When it is validly transferred, or "negotiated," the person to whom it was transferred can present the invoice and receive payment. Negotiation is done by signing the back of the invoice, and writing the words, "Pay to M___ (name of transferee)."

Getting Less So You Can Do More
Since you don't want to wait thirty days to get your money, you can sell the invoice at a discount. You do this buy finding a buyer, signing your name at the back of the invoice, and writing an order, "Pay to ___ (buyer)." You will receive money that is less than the invoice is worth, but you will at least have it without waiting thirty days. Invoice discounting is a good way to keep your cash flow steady. You can now use the money to continue your operations, and make more profits. This way, you do more with less.


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