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.
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.
There are two types of invoice financing systems that a construction company can opt for-
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.
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.
Aside from the initial liquidity streamlining, invoice financing can have several positive impacts on the construction sector, such as-
Trusted financial lenders ensure that a business can get its funds sanctioned within 24 to 72 hours.
No, businesses usually receive 90-95% of the invoice value upfront from the financier. Once the customer makes full payment, the balance amount is remitted to the business.
There is no upper limit for the funds sanctioned against a business's unpaid invoices. The funding depends upon the eligibility and requirements of the business.
The economic environment of this country is evolving. So, invoice discounting or factoring can become a new norm in the construction sector. A digitised invoice financing model can be significantly cost-effective compared to the high-interest rates of a business credit card or a secured loan.