What is Invoice Financing, and How Can It Benefit Business Cash Flow?

  • KredX Editorial Team
  • 20 Aug 20
  • Bill-Discounting,business,Invoice Discounting
Sufficient inflow of funds is essential to ensure the day-to-day operations for your business to continue running efficiently. However, unpaid invoices can tie up funds better used elsewhere. You can thus resort to invoice financing to channel capital towards your business expenses with ease. It is one of the simplest ways to avail cash instantly for your business.

What Is Invoice Financing?

When you sell goods or services on credit to customers, you generate invoices. These bills or invoices are receivables, which you may get between 30 – 90 days, as per your debtor’s policy. Unplanned expenses can, nevertheless, arise within this time frame, which may require immediate funding, like restocking the inventory. With invoice financing, you can thus leverage the unpaid bills to raise immediate funds for your business. You can sell the invoices to a financial institution, which then provides a cash advance against its value at a discounted rate. One of the advantages of invoice financing is that it allows you to address financial emergencies. You can also utilise such funds to mitigate a host of expenses.

How Does Invoice Financing Work?

The rapid digitisation of India’s financial landscape, as well as the emergence of several fintech lenders, has made accessing funding options, such as bill financing, considerably easier for borrowers. With some financial institutions, you can avail funds via invoice financing entirely online.

Here’s how the process works:

  • Your business generates bills against the sales of goods or services
  • Next, you provide the specifics of those invoices along with supporting documents to the selected financial institution
  • This lender assesses your application and subsequently sanctions a cash advance as a percentage of the invoice value
  • Following that, either your business’s credit controller or the financial institution sets to realise those outstanding payments
  • When realised in full, the lender forwards the balance amount to you, minus the service fee.

How Can Invoice Financing Help Cash Flow?

Bill financing offers several advantages to business organisations, especially those with a small or medium scale of operation. Let’s take a look at a few of them.
  • Access To Immediate Funds

Traditional business loans involve lengthy paperwork and several verifications, which can delay fund disbursal. On the other hand, one of the benefits of invoice financing is that it involves minimal formalities. Thus, you can access funds much quickly, which can help you manage business cash flow better.
  • Substantial Amount

You can raise considerable funds via invoice financing depending on the total value of the invoice at hand. Invoice financiers provide cash advance ranging up to 95% of total receivables. Thus, it allows you to handle the day-to-day operations of your business efficiently.  You can also use the loan amount to address an array of expenditures. For instance, it can be used to pay suppliers, replenish inventory, or fund an expansion project.
  • Better Handling Of Bad Debts

One of the most significant advantages of invoice financing is that few financers also provide protection against bad debts. When your customers turn insolvent or default in bill payment, this factor comes into play. Thus, it eases the burden of bad debts on your business finances, ensuring proper cash flow management
  • Saves Time In Payment Collection

Bill financing involves two major subsets, discounting and factoring. If you opt for invoice factoring, the lender assumes the role of the credit controller and collects payments from debtors on your behalf. Thus, it saves time on your part, freeing you to focus on other pressing concerns of the business.

The Bottomline

In essence, invoice financing is a way to free up funds due to your debtors early on to meet the necessary expenses of your enterprise. Hence, it strengthens your organisation’s cash flow, providing for better operational efficiency.