Pitfalls Of Bill Discounting

Bill discounting is a technique used by businesses looking to boost their cash flow. It’s a highly effective strategy because it replicates the effect of customers paying invoices immediately.

However, it pays to dig a little deeper to understand the implications of exactly how it can impact businesses.

TL; DR

Bill discounting is a great way to improve cash flow in your business, but a lack of flexibility from most providers can lead to higher costs and minimise its benefits. FundTap has been designed to deliver all the traditional benefits without any obligations or regular fees, allowing business owners to get quick finance as they need it.

Overview on bill discounting/invoice discounting

Bill discounting, also known as invoice discounting or vendor bill discounting, is when businesses sell their invoices to a specialist bill discounting facility for less than the full value.

Businesses may also be able to get bill discounting from banks, which can save dealing with multiple borrowers.

From the business perspective, they sacrifice a portion of the invoice for the security of having it paid straight away, which boosts cash flow and gives them greater ability to pay running costs or finance their growth.

This is one way it’s becoming a popular type of business finance.

It’s not to be confused with invoice financing, which is similar but involves a few key differences – more on this point shortly.

Read more: Understanding invoice finance

What are the advantages of invoice discounting?

There are a range of advantages of bill discounting, including:

Increased cash flow

Being able to improve cash flow is the main reason businesses use bill discounting.

In some cases, it can take months between invoicing customers and receiving payment, and in that time a business has to be able to cover all its outgoings.

For businesses that run on tight margins or don’t have large bank balances, that isn’t always easy.

By selling invoices to a bill discounting company, businesses can get payment within 48 hours to use how they need. This is much faster than other forms of business lending that can take weeks to arrange.

Frees up liquid cash

While accounts receivable are a considerable business asset (and often among the largest a business has on its books), it’s not actually useful until customers pay their invoices. You can’t easily use accounts receivable to pay bills or purchase stock.

Bill discounting turns receivables into hard cash in the same way that a customer paying an invoice does, but with much more reliability. You have no idea when a customer will pay an invoice, and many pay them late.

Greater control for businesses

Bill discounting and invoice factoring are similar forms of finance, though with invoice factoring, the financing facility takes on collection of the invoice.

While having to chase late invoice payments may not sound like an advantage, it means businesses keep control over their own invoices and their relationships with customers.

It also prevents having to edit the bank account on your invoices and telling customers you’re using a form of finance.

Facilitates paying suppliers early

Suppliers often have early payment discounts, which reduce a businesses overall costs. Getting the money from invoices immediately means you’re more likely to be able to take advantage of any such offer.

Pitfalls of bill discounting

While it has its up sides, there are a few pitfalls of business factoring that are worth considering before you sign up.

Greater cost

As a form of short term business lending, bill discounting typically comes with higher rates than conventional lending, overdrafts or credit cards.

This cost is exacerbated when businesses constantly use bill discounting, which many do. However, if you use bill discounting sporadically (i.e. only when you need it) then it keeps the cost of borrowing down.

When used as a short term business loan, the balance of bill discounting can be repaid within a month, which can make it cheaper than other lending.

The problem? Bill discounting companies generally don’t allow businesses to have this amount of flexibility. They require them to use bill discounting for every invoice they send.

Higher reliance on bills discounting

As mentioned in the previous point, bill discounting facilities typically require customers to use them for all of their invoices. Not only does this drive up the cost of borrowing, but it promotes a reliance on it as a source of finance and mitigates the benefit of it.

It can be easy to get trapped in a debt cycle of needless borrowing and end up struggling to operate without artificially stimulating cash flow.

Decrease in profit margins

While bill discounting helps to improve a business’ cash flow, it’s also a cost that reduces your profit.

In saying that, it’s worth assessing this cost against another alternative. All borrowing costs money, and because bill discounting is designed to be a short term form of business lending, it often ends up cheaper than a bank loan or other form of finance.

Read more: Things to know about invoice lending

Only commercial invoices

Bill discounting is only available to businesses who earn revenue through commercial invoices. You won’t be eligible if your business sells to the general public.

Leniency in credit terms may affect productivity

Businesses that constantly rely on bill discounting can easily lose focus when it comes to improving their credit rating. Bill discounting is often used on top of other forms of borrowing, and carrying larger liabilities can impact your ability to get credit elsewhere.

It’s best to use bill discounting as a short term mechanism to improve cash flow when needed, not constantly, as that can mask your businesses real, organic cash flow before this type of stimulation.

Final thoughts

Plainly, invoice finance helps businesses with cash flow, but a lack of flexibility takes away from the advantages it provides for businesses.

Enter, FundTap.

FundTap eliminates the pitfalls of bill discounting by allowing businesses the flexibility to pick and choose when they use it. There are no system, subscription or administrative fees, and you have full control over which invoices you receive finance for.

Don’t need a cash flow boost this month? Great, don’t use it. It won’t cost you a thing.

Creating a FundTap account is paperless and takes just five minutes. It links with your accounting software to make things easy. You can be approved for funding the same day, creating a highly effective and affordable safety net for whenever you need a cash flow boost.

Find out more about how FundTap overcomes the problems of traditional bill discounting, or check out a free demo today.