How Is Invoice Funding Helping Small Businesses and Suppliers?

Late payments from large clients and lack of credit are persistent issues that the Indian MSME sector usually faces. The MSME sector is the backbone of the Indian economy, contributing 30% of the country’s GDP. According to the report of the MSME Ministry, India has 63.3 million MSMEs, of which only 6-9 million MSMEs can get access to formal credit. This massive credit gap can be easily be smoothed by opting for Invoice funding. 

Wondering what Invoice funding is and how can it rescue small businesses and suppliers? Read along!

Invoice Funding: In A Nutshell

Invoice funding is a short-term borrowing instrument that financial institutions/lenders extend to customers against unpaid invoices. 

Here, unpaid invoices refer to accounts receivables, meaning that small businesses/companies will receive the amount later. Invoice financing can be done in two ways, namely factoring and discounting. 

Invoice Factoring refers to the arrangement where small businesses connect with a lender to sell unpaid invoices. Here, a lender can pay up to 75% of the invoice amount to the small business and company. The lender will repay the amount (if received from customers in full) to the company after deducting interest and other charges. Remember, the company retains full power to control the customers and collect money. On the other hand, a business that has sold the invoice to lenders does not have to worry about collecting money from customers.

Invoice Discounting refers to a process where small businesses and companies can get up to 90% of the invoice amount. The only difference between these two variants is that, in the first instance, customers pay to a factoring company. In case of invoice discounting, customers pay to the company as usual without knowing that another company/lender is involved in the collection process. 

Small businesses willing to maintain consistent cash flow and expand can purchase new stocks and get invoices liquidated by financial institutions. Thus, by bringing such a credit instrument into the market, manufacturers and suppliers/retailers/distributors can smoothly continue business operations. Whereas manufacturers can sell more stocks, suppliers/retailers/distributors can purchase more stocks with the help of invoice funding.   

With a clear understanding of invoice finding, let’s find out how invoice funding can help small businesses and suppliers.

Ways In Which Invoice Funding Helps Small Businesses And Suppliers

Following is a list of ways through which invoice funding can help small businesses and suppliers: 

• Increased Cash Flow

It is a known fact that bigger companies have flexibility regarding cash flow, which is a concerning matter for small businesses. However, small businesses can easily handle cash crunch and improve cash flow without any hassle with invoice financing. 

This easy credit facility enables small businesses to efficiently handle expenses, cash flow and maximises opportunities at any given time. Invoice funding plays a crucial role for a seasonal business that can increase production by maintaining a consistent cash flow and investing in other areas, such as marketing, paying overtime to employees, stocking raw materials per requirement, etc.         

• Transparent Process And Flexible Repayment Options  

New age invoice fund providers have introduced a transparent process that helps in building trust among small businesses and suppliers. 

For instance, a reputed online platform/marketplace like KredX offers invoice funding (Invoice discounting), maintaining utmost transparency. By following only 4 steps, small businesses and suppliers can avail paperless invoice discounting within 24-72 hours. Thus, these business components can quickly resolve working capital issues and continue operations without worrying about paperwork, hidden charges, and other things. 

Further, the repayment tenure is short in case of Invoice discounting (30-90 days), and if small businesses and suppliers opt for this facility through KredX, they need not pay on a monthly basis. Such flexible terms benefit small businesses and suppliers in many ways. 

• Customisation Opportunity 

Invoice discounting allows small businesses and suppliers to enjoy customisation facilities. Here, companies can select the cash amount per their requirements. 

Further, they can decide on the time period for invoice funding. 

Since invoice funding is a short-term borrowing instrument, small businesses and suppliers can easily pay back the amount within the stipulated period. Further, they can utilise the credit per their requirements during their tenure, as there are no end-use restrictions. Such facilities undoubtedly can help small businesses and suppliers to flourish.

• Reducing Risk Of Bad Debt 

Bad debts are a nightmare for businesses of every size. Rs. 15 trillion outstanding dues of the MSME sector explain the conditions. However, all these grave issues can be addressed by opting for borrowing instruments like Invoice discounting. 

Here, lenders have professional experience in dealing with defaulters. Hence, if the whole arrangement is made after a thorough consultation with manufacturers, the rate of delinquency can be brought to almost zero.   

• No Need Of Collateral

One of the prime advantages of invoice funding is that this credit facility can be availed without pledging any collateral. In case of Invoice discounting, small businesses can get funding against unpaid invoices, which acts as pseudo collateral or assets or as an assurance of payment. Thus, small businesses with bad credit scores, small turnover, or new in the market can leverage unpaid invoices and continue day-to-day business operations.

Bottom Line

The Indian economy largely depends on the MSME sector, i.e., small business industries. Their massive growth and chances of greater contribution to the country’s economy are obstructed at the basic level, i.e., credit facility stage. However, with financing tools like invoice funding, small business and suppliers can resolve liquidity issues and help achieve their goals. Invoice funding as a financial product is gaining much popularity, and by unlocking this resource, a small business can grow further, taking the growth of the Indian economy to the next level.