Invoice financing or invoice discounting, or accounts receivable financing, is a concept that is slowly gaining traction in the SME space in India.
In stark contrast to their larger counterparts, small and medium-sized enterprises (SMEs) frequently lack the financial resources to operate. When business owners have to wait two or three months for payment, this is an exceptionally trying time.
Because of these long payment terms, businesses risk losing contracts, customers, suppliers, and even employees if they can’t pay their bills.
When this happens, business owners typically look for a business loan to get them out of the turbulent time. Finding a business loan to meet financial needs at the right time is hard, though, because the approval process takes a long time, there is a lot of paperwork, and the requirements are very strict.
In such situations, invoice financing or invoice discounting becomes a more lucrative option for attaining working capital.
In this article, we explore the hows and whys of invoice financing and, most importantly, how it helps an SME with their working capital requirements.
Key takeaways
1. What is invoice financing?
2. What are the features of invoice financing?
3. In what situations can you use invoice financing?
4. What are the differences between invoice financing and invoice factoring?
5. What are the things to consider?
1. What is invoice financing?
Invoice financing, or invoice discounting, is a process whereby small and medium-sized enterprises (SMEs) are able to close the gap between income and cash flow by pledging their outstanding bills to the bank for an urgent cash advance. This is one of the fastest and most convenient ways to get cash quickly without taking out a loan.
2. What are the features of invoice financing?
Invoice financing does not require collateral; instead, an invoice serves as collateral for the money borrowed.
With invoice financing, you enjoy convenient repayment tenure, sometimes even until you receive payments from your customers.
One gets hassle-free loans within 2 days (that’s the timeline UpScale suggests).
3. In what situations can you use invoice financing?
You can utilize the money you get from a lender or invoice finance provider for anything related to running your company. Here are some examples of when it might make sense to use invoice financing:
- Buying supplies
- Hiring new employees
- Launching new products
- Paying for company expenses
- Purchasing or moving to a new business location
4. What are the differences between invoice financing and invoice factoring?
Invoice factoring is frequently misunderstood as invoice financing. Invoice factoring is the sale of unpaid bills by a small-to-medium-sized business to a third party in exchange for a discount. Invoice factoring adds another layer of complexity because your consumers will pay the bill amount to the third party rather than you. This might have a bad impact on the future of your relationship with this client.
Invoice finance, on the other hand, lets businesses get a line of credit for unpaid invoices without hurting their relationships with clients.
5. What are the things to be considered while using invoice financing?
It’s important for firms to know the potential downsides of any financing option before committing to it. The three most important factors to think about before committing to invoice finance (sales) are:
- Risk in collection
Even if the invoice total is large enough to cover the financing cost, there is still the chance that the customer will not pay on time for any reason. This leaves you vulnerable to fines for late payments or having to pay the whole thing out of pocket.
- Same invoice can’t be used multiple times
Due to the nature of invoices as “collateral” in this sort of financing, each invoice can only be used for one financing at a time.
- Carefully consider your borrowings
Despite its common usage as a substitute for up-front cash, invoice finance (sales) is actually a form of credit. In light of this, you need to watch out for the danger of becoming over-indebted.
Bonus read
Before diving into the process, do understand the meanings of the terms you will come across along the way. It is obvious that invoice discounting makes it easy to access working capital but to get rid of all the operational hassles that may come along with it, you can try out the invoice discounting option offered by UpScale.
In addition, UpScale by CredAble also offers comprehensive lending solutions for SMEs in India. It offers the advantage of applying to 10+ leading banks and NBFCs with one digital application and best-in-class competitive interest rates. For more information, please visit our blog here.