To understand how Invoice Discounting works we need to be aware of what happens to all importers, manufacturers and distributors around the world as they prepare their commercial offerings to the market.
As they prepare their products invoices are prepared that will cover each and every consignment to the Buyers (In Accounting terms called Debtors).
As time goes by Suppliers build up a portfolio of all their unpaid invoices to Buyers in their Debtors Ledgers which are Assets in their businesses.
Financiers like to expose themselves to a business’ Assets to secure themselves. Therefore in Invoice Discounting, in terms of the Invoice Discounting Agreement between Financier and Supplier, the Financier actually conditionally buys unpaid invoices from a Supplier, so giving the Supplier the Working Capital he needs to continue his business.
To enable Suppliers to pay wages on time and to purchase raw materials and products to complete his offering to the markets he serves.
Benefits to the Supplier
In addition to the obvious benefits that a Supplier receives because of his Invoice Discounting Agreement with his Financier referred to above the supplier normally would have enough funds to pay those he owes, his Creditors, in terms of the tenets of the invoices he has received from his Creditors, so securing his sources of supply to his business.
These are very valuable benefits to any importer, manufacturer or distributor of goods to a market, remembering that normally there would be enough money over for the Supplier to keep a roof over his family’s head. To keep them fed and to see to the children’s clothing and education.
When one thinks about these matters we see how a nation can benefit from Modern Working Capital Management Techniques!
Benefits to the Buyers
They benefit because an Invoice Discounting Supplier usually can keep paying to the tenets of the invoice/s, 30, 60, or 90 days away.
While it is not actually the Supplier that paying on time it is the Financier greasing the wheels to ensure that these payments are made.
Being paid in terms of the tenets of the invoices helps the Buyer, in turn, with his Cash Flow planning to keep his business efficient and his family circumstances under control.
Again we see how a nation benefits where Invoice Discounting procedures operate correctly under Modern Working Capital Management Techniques.
That is how Invoice Discounting works.
Roger Herbert
Modern Working Capital Techniques 