Invoice discounting is a great financial tool to alleviate cash flow problems that can be caused by the inherent delays in getting paid by insurance companies. It can be useful to auto repair businesses for various reasons such as expansion, cash flow issues or an influx of high value repair work. For whatever reason you may be considering invoice discounting, it is well worth understanding how it works. In this article, we will run through a step-by-step process of how invoice discounting works and explain some other possible financial tools for alleviating financial stress in the long or short term.
The Process of Invoice Discounting
The following is a typical example of how invoice discounting works:
- A vehicle arrives in your garage requiring work.
- A quote for repair work is sent to the insurance company.
- The insurance company accepts the quote and you; the repair company, get to work.
- When the repair is complete, you prepare the repair invoice and send it to the insurance company for payment.
- Talk to your invoice discounting company who will buy the invoice from you.
- The invoice discounting company will pay you the full invoice immediately minus a small processing or discounting fee – typically less than 2% of the invoiced amount.
- You reinvest this money immediately in your business to buy parts, complete repairs and generally get on with the work of managing your business.
- When the invoice is finally paid, the invoice discounting company takes this money.
- If the insurer fails to pay the full amount or any amount, then responsibility rests on the repair shop to chase up this sum or pay the residual back to the invoice discounting company
Alterations to the Invoice Discounting Process via Factoring
The process of business factoring is distinctly different to invoice discounting, although it similarly depends upon authorized invoices to generate working capital for your business. With factoring, the primary difference is that the financing company will take on the risk associated with the insurer failing to pay the invoice, and therefore the responsibility of chasing up debts. With factoring, the fee is typically larger, or the cash may be released to the auto repair company in two instalments.
Other Financial Instruments
It is also possible to take out business loans to create an influx of cash for your business, however these transactions can result in hefty interest repayments and may mean putting your business up as collateral for the loan.
Working Capital Finance are Industry Leading Suppliers of Invoice Discounting
Working Capital Finance are providers of invoice discounting for smash and auto repairers, panel shops, detailers and mechanics in Australia. If you are considering this service for your business, please talk to one of our consultants today by calling 02 9968 2328 or contacting us online.
Please note: The content of this article should be considered informational and not construed or considered to be actual financial advice.