Invoice discounting is the practice of using a company’s unpaid accounts receivable as collateral for a loan, which is issued by a finance company. Invoice discounting in Nigeria is provided by specialist finance companies and certain banks.
BENEFITS OF INVOICE DISCOUNTING
This is a special form of advance with peculiar characteristics, which may not even be recognized at first sight as borrowing. Nevertheless it is, in essence, a form of borrowing, and one which combines most of the desirable features of a bank advance.
Briefly, an advance is made on the face value of the bill against the security of the liability of the parties to the bill, or promissory note, being discounted. The banker must be careful to retain the customer’s liability by insisting on the endorsement of the instrument by him. The amount charged as `discount’ may be regarded as interest charged on the amount advanced until the maturity of the bill or note. The merits for bank of this form of lending are:
- The advance is, generally, short-term, provided it is a `trade bill’ representing a trading operation and part of working capital.
- The advance is self-liquidating, in the sense that payment of the bill to the bankers on its due date repays the debt.
- The banker can arrange his total portfolio of bills so that some are maturing almost every day, and thus provide the desirable feature of a continuous turnover of funds.
- Interest is a simple calculation on the amount of the bill and the time it has to run from the moment the money is lent.
- Security cover is obtained through the liability of all the parties to the instrument, i.e. those who have signed as acceptor and the drawer are collateral security to that of the borrowing customer, who should sign as endorser.