An ideal form of borrowing for business owners, bill discounting allows you to make use of the invoices issued by your business. If you sell products or services on credit, you will issue an invoice that is payable at a future date. But if you are in need of funds today, you can use these invoices and get the funds. You no longer need to wait for the due date of payment to get your hands on the funds. However, there are advantages and disadvantages of this method of financing. Let us take a look at them.
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Pros of bill discounting
Improved cash flow
Since bill discounting works quicker than banks, you will have immediate access to funds. This will improve the cash flow position of the business and you will be able to make the payments instantly. With a better cash flow, you can expand.
Enhances working capital cycle
Business owners are aware of the importance of working capital in the business and if you have payments to make, you will need to improve the working capital condition. When there is cash locked in unpaid invoices, you can free it up to keep the wheels of the business moving. It is ideal for businesses who have large value invoices as it can help improve the health of the company instantly.
Customers remain unaware
When you use the bills to generate cash, there is no need to inform the customers about it. Your customers will make the payment on the due date. It will not change the relationship between the customer and the business.
You pay interest on what you borrow
There is no need to pay a higher rate of interest on the loan. Instead, you only have to pay interest on the money you borrow. It works as a cost saving alternative over other forms of financing.
Cons of bill discounting
It can be hard to obtain credit
Raising funds through bill discounting is not an easy option for all businesses. It requires substantial turnover and there are some strict rules you need to meet. The company should be able to demonstrate a strong track record to be able to get access to funds.
This form of borrowing can come with a higher cost and higher processing fees as compared to bank loans or overdrafts.
Businesses could become reliant on bill discounting
The idea behind bill discounting is to get immediate access to funds and enjoy uninterrupted business functioning. However, it is also possible that businesses become trapped in a cycle of debt and are unable to operate without the monthly cash flow arrangement.
These are a few pros and cons of bill discounting but it is certainly one of the best forms of borrowing in the country. The pros outweigh the cons and make it an easy and convenient choice for business owners. It also allows you to make the most of the bills issued by the business.