How To Fund A Start-up With Invoice Finance

How To Fund A Start-up With Invoice Finance

A start-up venture often poses higher capital requirements when compared to an established company. It is mostly because the former is in the nascent stages and needs to figure out an array of possibilities to make a solid foundation in the world of business. 

Regardless of their need for capital, the supply for the same is quite limited. Resultantly, start-ups often resort to external sources of funding like a business loan. 

However, experts recommend new businesses to refrain from accumulating debt and causing disparities in their available working capital. Furthermore, they suggest entrepreneurs opt for alternative financing options like invoice finance in order to cater to their operating capital-based needs.

What Is Invoice Finance For Start-ups?

Invoice finance is essentially a type of funding option; wherein, businesses can borrow funds against unpaid invoices. In the case of start-ups, invoice financing serves as a means to resolve problems related to a liquidity crisis and other working capital needs.

In general, one can avail of invoice financing in two distinct ways, namely –

  1. Invoice Factoring – An arrangement where a firm sells its unpaid invoices to a financier. Usually, invoice factoring fetches up to 75% of the invoices.
  2. Invoice Discounting – The arrangement is the same as invoice factoring. However, this financing option fetches businesses as much as 90% of the invoices’ value. 

Businesses also have the option to choose selective invoice finance, wherein, instead of using the entire sales ledger, they can use specific invoices to raise funds. It is considered to be an ideal option for businesses that rely on a few invoices that are valued substantially. Nonetheless, they may also check other types of invoice discounting like – confidential invoice discounting and whole turnover invoice discounting.

Notable differences between invoice factoring and invoice discounting are discussed in the table below, to help distinguish them better –

Parameters  Invoice Factoring  Invoice Discounting 
Credit control  The service provider takes over the company’s sales ledger. The service providers do not take over control of the company’s sales ledger.
Confidentiality  There is no confidentiality in the case of invoice factoring. Customers pay the service provider directly. The cash ledger is kept confidential. Customers are not kept in the loop regarding the invoice discounting service. 
Collection  The service provider chases payments from customers.  Businesses chase payment from the customers.

How To Fund A Start-Up With Invoice Finance?

These steps below elucidate how invoice finance works and consequently provide a fair idea of how to fund a start-up with it.

Step 1 – Business operations continue as usual, and the firm raises an invoice against its client.

Step 2 – Once all terms of payment and services are agreed upon, the invoice detail is shared with such a finance service provider.

Step 3 – On receiving approval, the financier forwards the agreed percentage of the invoice’s value to the business owner.

Step 4 – Depending on the type of invoice finance, either the business owner will be required to chase the invoice payment or the financier will avail the same from the customer in question.

Step 5 – After the payment against invoices is settled, the entrepreneur will receive the remaining balance minus the pre-defined service charges.  

Following these steps, a start-up company can access funds through invoice financing. 

Reasons For Start-Ups To Opt For Invoice Finance 

Here’s why start-ups should avail of invoice financing services –

  • To shorten the working capital cycle.
  • To ensure a smooth flow of operational activities.
  • To eliminate the need for chasing after payments.
  • To boost their immediate cash flow requirements. 

Benefits Of Invoice Financing For Start-ups

These following pointers offer a fair idea about why invoice financing is more convenient than any other funding option –  

  • One can avail of invoice financing without having an extensive financial history. It directly makes it easier for start-up owners to avail of the required funding and manage working capital seamlessly. 
  • Invoice financing helps to access funds quickly and in turn, allows accounting for urgent financial obligations more conveniently. For instance, through invoice discounting, one can access funds within 24 hours to 72 hours from leading fintech companies in India. It helps start-ups to keep their everyday operations active and prevents unwarranted interruptions.  
  • It eliminates the hassle of incurring additional debt. As a result, businesses can manage their immediate working capital more effectively and optimise operating activities successfully.

One of the best things about invoice finance is that one can use it along with other means of financing. For instance, for capital appreciation, businesses may avail lease-renting discounting or revenue-based funding alongside invoice financing and account for their capital requirements.

Bottom Line

Both, the features and the accompanying benefits of invoice finance, come in handy for start-up companies. Businesses must, however, select the most suitable financing option and scrutinise its merits and demerits before opting for it. Also, the selection of a leading invoice financing platform plays a vital role in keeping the entire process smooth.