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Invoice Funding Models: What They Are and What They can Do

Cash is the life blood of business operations. Companies may have to deal with the adverse condition at times. The question is, how do they tackle such circumstances without affecting the business?

Invoice funding is the answer. It is a well-accepted model of financial assistance in business across verticals. The advantage of invoice financing is that the enterprise should not have to wait for accounts receivable before paying its staff, purchasing equipment, or paying rent. With invoice funding, they can do so as soon as they receive the funds from the bank or lender.

Invoice funding or invoice finance allows firms to borrow money against amounts owed by consumers. It enables businesses to reinvest in operations and growth sooner than they could if they had to wait for their customers to pay their bills fully.

Now, there are two helpful invoice funding models. One is Supply chain financing, and the second model is called Dynamic Discounting. Here, we will tell you more about these funding models and how they can help businesses during any crisis.   

Supply chain finance (or SCF) is a type of supplier finance in which suppliers can obtain payment on their invoices in advance. Supply chain finance mitigates the risk of supply chain disruption and allows customers and suppliers to optimize their working capital. It is also known as reverse factoring.

Dynamic discounting is a technique that improves a buyer’s profitability by lowering the cost of goods sold (COGS). Dynamic discounting permits the buyer’s vendors to decide when they want to be paid in exchange for a more economical rate on the goods and/or services purchased. 

Supply chain finance 

Supply chains are the arteries of commerce. Finance and liquidity move through them, ensuring the overall health of the ecosystem. The term supply chain finance is a vendor finance approach in which the company or buyer pays the supplier using a third-party financier. Depending on the buyer’s creditworthiness, the financier makes funds available to it early. Many people misinterpret it as a loan but it is not a loan.

This strategy, like other ways of supplier finance, benefits both parties involved in the transaction. The main advantage of this supplier finance approach for the business is that it does not use the balance sheet to make a payment. It contributes to a smoother business flow because the supplier receives continuous compensation through this type of invoice financing thanks to the financier. 

Dynamic discounting

Dynamic discounting is a vendor finance approach in which the company uses its extra cash to compensate its suppliers or vendors. In exchange, the supplier sells the goods or services at a lesser price or a discount off the original price. Cash discounting or invoice discounting is based on straightforward logic.

The larger the discount granted by the seller, the faster the payment is made. It gives the company flexibility and command over payment terms; they also have complete control over the time of payment. It is a type of ‘early payment discount’ on an invoice basis. This supply chain management approach benefits both buyers and suppliers since the customer receives goods at a lower cost, and the supplier obtains the benefit of receiving money earlier.  

Every business wants to achieve a higher profit with the least possible investment and operation cost. Hindrances like unstable economic conditions, limited availability of cash, and strict credit policies of financial institutions make growth difficult for small and medium-sized businesses. To overcome these hurdles, the company can use a different way of vendor finance. Here are some benefits of these funding models.  

Dynamic discounting and supply chain financing are two popular finance strategies among SMEs. Automation of company procedures is crucial for organizations to reap positive impacts from these funding methods.

Optimum Finance  hosted a group of finance leaders to discuss a funding option that most businesses miss out on in May. The panel unanimously had a resounding agreement between everyone that invoice finance is a vital tool to help firms bounce back and stay on top of their deferred taxes, loan payments, and rent.

Free flow of businesses, how and why

In today’s fast-paced world, your business needs and the external economic climate can change quickly, so it is inevitable for any business to decide smart and switch to a better funding model that works for you today, tomorrow, and forever!

An efficient invoice funding model will allow the firm to focus on the day-to-day transactional issues that typically slow a business down. We need to understand that an ideal funding model of the present time may not be such a good fit two years down the line.

Similarly, if your company model incorporates seasonal changes, you may require two models at different periods of the year. Rather than choosing between supply chain finance and dynamic discounting, it is always ideal to use both the models considering the needs. Experience a hassle-free invoicing with  SkyscendPay.  


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