Invoice Finance for Construction
The rapidly expanding construction industry has emerged as a cornerstone of India's economic blueprint for the coming years. So, there is a renewed interest in the real estate and urban development market here. Consequently, business owners are opting for alternative funding means designed specifically for this sector's growth.
Invoice Financing has surfaced as a supply chain-based lending protocol for the construction market. This short-term funding model can effectively offer businesses a working capital boost if they are struggling with a cash crunch. A number of leading FinTech services like KredX have been crucial in solving a business' liquidity issues.
What Is Invoice Financing For Construction?
When a business sells a product or a service to a buyer, it raises a legally binding document called an invoice. This invoice underlines the payment receivable and the maturity period of this agreement. Longer payment terms, thus, can result in this credit taking months to convert into cash.
With rapid expansion of contractors and subcontractors in the construction sector, cash tangled up in these accounts receivables can jeopardise a company's monetary inflow and outflow. As this sector especially functions around milestone invoices, an unreleased fund can become an obstacle to a smooth workflow.
If cash remains unreleased against applications of payment and staged or sales invoices, a construction company can face difficulties regarding necessary expenditure. As a result, the construction work may be lagging behind schedule at every step. Moreover, without an unrestrained cash flow, a company's sales ledger can get adversely affected.
In this scenario, a construction business can opt to sell off these unpaid invoices to a financial intermediary. Based on the value of the raised invoices, these financiers offer a cash advance upfront to the business, usually up to 95% of the total invoice value. These intermediaries provide construction-financing for businesses working under a contract, construction agreement or purchase order, including certified and uncertified payment applications. As this fund sanction is done in a few days, it can be a short-term integrated cash flow solution for the construction business owners.
Invoice financing essentially operates as a series of business loans, with the invoices acting as a security. Finance providers are aware that a business is owed money from its customers, so they are willing to reimburse the business upfront almost immediately. Additionally, as the transaction is technically an advance and not a loan in the traditional sense, this form of alternative funding does not affect a business' balance sheets.
Types Of Invoice Financing For Construction Sector
There are two types of invoice financing systems that a construction company can opt for-
- Invoice Factoring:
In a receivable financing model, these intermediaries buying the unpaid invoices are referred to as a Factor. If a business chooses to opt for invoice factoring, its customer will be aware of this involvement of a third-party financier. So, it is the responsibility of the Factor to chase up the accounts receivable. Once a customer completes repayment, the Factor will transfer the due balance of the invoice to the business, minus a fee.
- Invoice Discounting:
Unlike factoring, invoice discounting works on a strictly confidential basis. Here a customer remains unaware of any involvement of a third-party financing firm. So, the working relationship between a business and its customers remains unaltered. Consequently, the responsibility of collecting and dunning stays with the business itself.
Benefits Of Invoice Financing In India For Construction
Aside from the initial liquidity streamlining, invoice financing can have several positive impacts on the construction sector, such as-
- Bad Debt Protection (BDP) can be added to the agreement to safeguard a business from non-payment caused by customer insolvency. If a business opts for non-recourse funding, the financier absorbs the cost of an unpaid invoice.
- Invoice financing can be crucial in revitalising the small businesses or MSMEs functioning in the construction sector. Institutional lending is inherently asset-based, so these companies are treated as high-risk borrowers. As this alternative financing method eliminates the need for collateral, small businesses lacking assets or capital can get these services.
- Compared to traditional lenders, financiers in this business model are more adaptive to the market's changing demands. Moreover, a flexible regulatory framework allows businesses to sign up for this service time-efficiently.
- If a business is dealing with foreign accounts receivables, opting for invoice financing can save the costs related to Letters of Credit, Documents against Acceptance and Documents against Payment, etc.
- An upfront funding allows a business to bid on the prospects of a future project. Emphasising its sustainable growth and investment plans can give it an edge in the competitive product market.
- This funding model is applicable to contractors and sub-contractors within the construction sector.
- Top tier FinTech services that operate as a financial intermediary ensure that a business can get real-time invoice status updates via self-serve modules.
- As invoice financing is a comprehensively digitised method, businesses can easily upload their necessary documents on the financier's platform. This paperless procedure also ensures a hassle-free and customised user experience.
- When opting for invoice financing from trusted fintech services like KredX, a business owner can rest assured about the transparency regarding fund disbursal or invoice listing.