Discounts or Credit Lines: What is the Best for Your Business?
The discount and credit line are two financial tools widely used by SMEs and freelancers in the day to day performance of their professional activity.
Both provide liquidity and financing at specific times depending on the needs. But how do we know which of the two is the best for our business activity?
Well, in reality, there is no single answer, since the purpose of these two financing instruments is different, so much so that a large number of companies use both.
But, let us start at the beginning, and let the expert accountants at www.gsmaccountants.co.uk explain …
What is a discount line?
A discount line, like the credit line, is also a financial product that some entities offer. In order to advance the payment of certain documents such as bills, promissory notes, cheques, etc.
What is its purpose?
In this way, if we have one, we can collect all the outstanding amounts from our clients without having to wait for the pre-established deadline to be met. In short, what we will obtain will be immediate liquidity. This is a common factor with the line of credit.
How does the discount line help us?
In obtaining immediate liquidity. Imagine that for example in the same month, all the payments that we have to receive from our customers, are programmed for three months. If we had to wait for the expiration period to be able to collect them. Our business would suffer serious consequences, since we would have to survive three months without cash. This would be totally unfeasible.
The solution of the discount line is ideal for such cases.
What is a credit line?
It is a financial product that banks usually offer (although there are other alternatives nowadays). For which a certain amount of money is available to us that we can access immediately.
What is its purpose?
Providing liquidity immediately to deal with possible contingencies and extraordinary expenses.
Imagine that it is time to pay the payroll of our staff and we still do not have sufficient liquidity to make full payment effectively. The reason is that we have a remittance of invoices and documents pending payment from our clients.
How does the credit line help us?
If we have one, we will be able to use it to cover this ordinary expense (payroll payment) and when we receive the payment from our clients, we can replenish the amount of credit used.
What are the main differences between a credit and discount line?
A line of credit is comparable to a financial piggy bank that we will use only when we need it. Therefore, for example, for expenses such as the purchase of machinery or similar,it will not be useful.
A discount line will be a short-term financial instrument since the entity will advance us the collection of invoices or other accounts payable from our clients in exchange for interest and commissions.
It must also said that using one method does not exclude the other. In fact, they complement each other and there are already entities that offer both in the same pack.
Now that you have all the information, what is the most useful tool for your business model?
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