Can Invoice Financing Be Beneficial For SMEs?

The SME sector is widely touted as the Indian economy’s engine of growth. As per a report shared by FICCI, this sector is responsible for creating over 11.10 crore jobs in the nation. Small and medium enterprises also make up around 40% of India’s export and 45% of its manufacturing output.

Access to business loans more readily has also been pivotal to the growth of SMEs in India. But, while obtaining loans has become simpler over the years, many enterprises still struggle to repay them for more than one reason.

That’s why, with the growing popularity of alternative funding options like invoice financing, more businesses are now interested in tapping into their unpaid invoices rather than taking out a new loan.

In case you are an SME owner and are wondering the worth of invoice or bill financing, we would recommend you first go through the concept and its offering. Following this, you may be in a better position to decide whether the same is going to be beneficial for your firm or not.

On that note, let us take a quick look at the fundamentals of invoice financing in brief.

Invoice Financing – In Brief 

Essentially, it is a process of accessing funds with the help of unpaid invoices. Enterprises use their accounts receivables (yet to be realised) to access immediate cash and meet working capital and other urgent cash flow-related requirements. 

These pointers walk you through this process in general –

• SMEs sell products or services to customers on credit and draw an invoice containing details of the same.
• Due date is agreed upon when the customer will pay the seller back at set terms.
• Repayment periods can be as long as 90 days.  To shorten the working capital cycle, businesses approach fintech companies providing integrated cash flow solutions like invoice discounting 
• Fintech companies like KredX offer a platform to various firms where they can upload their unpaid invoices and enchash them on their portal. 
• After verifying those invoices and scrutinising their creditworthiness, such financier disburses an agreed percentage of the invoice amount.
• On maturity, the seller (in case of invoice discounting) collects the invoice amount and pays it to the financier.
• The fintech company then proceeds to release the remaining balance after deducting its service charge.

A Quick Glance At The Types Of Invoice Financing 

In a broader sense, one can divide into two types of invoice financing. You should note that both work on the same principle but follow a different financing structure.

• Invoice Discounting

This works in favour of businesses that do not wish to involve customers and want to maintain confidentiality. In invoice discounting, enterprises can retain control over the sales ledger and are also responsible for collecting the invoice amount from customers on maturity. 

• Invoice Factoring

In the case of invoice factoring, businesses sell their invoices to financiers at a discounted rate and hand over their credit control. On maturity, financiers collect unpaid invoices from the customers. This does not leave any scope for confidentiality as the customers are directly involved in the arrangement. 

Salient Features And Benefits Of Invoice Financing 

Take a look at these top features and benefits of invoice or receivable financing –

• Businesses do not necessarily need to provide any collateral to access funds. You can raise money based on the outstanding invoice’s value and the customer’s creditworthiness.
• Until the end, the ownership of the invoice is retained by the business, meaning you will not lose your control over the sales ledger.
• You can release up to 90% of the tied-up capital in the unpaid invoice through financing.
• Leading fintech companies like KredX lay down easy to meet eligibility and disburse invoice amount within 24 hours – 72 hours*. This feature comes in handy when you need to address immediate obligations like paying vendors, starting new projects, paying salaries, etc. 
• Invoice discounting helps businesses maintain confidentiality about their financial standing and further helps business keep their customers out of the loop. Thus, it facilitates better customer relationships.
• SMEs can provide goods and services on credit for a long tenure. This will further help them increase their customer base and retain existing ones without disrupting their daily operating activities. 

Bottom Line

Invoice financing is a valuable financing option for small and medium enterprises and even better than traditional business loans in some respects. Enterprises can select between accounts receivable discounting or factoring to raise funds within a short span to address your working capital-related problems smoothly. It allows businesses to trim the working capital cycle and speed up short-term investments.