Purchase Invoice Discounting
Purchase invoice discounting allows businesses to improve cash flow by leveraging their unpaid purchase invoices (bills received from suppliers). The idea is to gain early access to working capital before the payment to the supplier is due
How it works in detail:
• Step 1
A business purchases goods or services from a supplier on credit terms (e.g., 30 days to pay).
• Step 2
The business receives a purchase invoice from the supplier for the goods or services delivered. Instead of waiting until the due date to pay the supplier, the business approaches a financial institution.
• Step 3
The business submits the unpaid purchase invoice to the financial institution for discounting. The financial institution assesses the invoice and agrees to provide an advance (usually a percentage, say 80%, of the invoice value).
• Step 4
The financial institution advances the agreed amount to the business, allowing it to pay the supplier or use the funds for other working capital needs.
• Step 5
When the payment for the purchase invoice is eventually due, the business settles the invoice by paying the supplier, and the loan (or advance) from the financial institution is repaid in full.
This process helps businesses manage their cash flow by ensuring that they have funds on hand even before they pay their suppliers.