Sufficient inflow of capital is undoubtedly one of the essential requirements of running a business successfully. An enterprise that is low on its growth capital or working capital is susceptible to losses, and can miss out on lucrative opportunities. Further, without adequate funds, a business falls short to maintain its working capital and liquid cash reserve, which in turn hampers its everyday operating activities.
Regardless, financing options like business loans and invoice discounting, ensure that enterprises have access to adequate funds at all times, irrespective of its business cycle. It is, however, vital to understand, which one is better for an enterprise and can help to resolve the debate of business loan vs invoice discounting.
A business loan is a kind of a credit that is designed to cater to specific business purposes. In most cases, a business loan is an unsecured credit, i.e. borrowers do not have to hypothecate any asset as collateral. Nonetheless, some financial institutions may allow enterprises to avail secured business credits by providing an asset as a security. Typically, a secured business credit accompanies a lower rate of interest.
Generally, individuals avail a business loan to start a venture, keep business operations smooth, or to expand the scale of operations and operational units.
Following are the different types of business loans available –
Let us now take a look at the fundamentals of invoice discounting to gain a better idea about business loan vs invoice discounting.
Invoice discounting is an alternative form of financing, wherein businesses can sell their outstanding accounts receivable or invoice to a financier to avail working capital. The said financing option is an effective means of releasing cash that is blocked in unpaid invoices and in turn, helps to increase the immediate cash flow of a company.
Like business loans, individuals do not need to provide any security to access funds via invoice discounting. In fact, with this financing option, the unpaid invoices in themselves serve as security, and help to avail funds by leveraging the company's sales ledger.
Unlike business loans, invoice discounting is a more flexible funding option that does not require businesses to meet stringent eligibility criteria. Further, the entire process is quite hassle-free, and offers access to a significant portion of the invoice amount.
With KredX's invoice discounting service, businesses can raise funds to meet their immediate cash flow requirements instantly within 24 - 72 hours*.
These are among the noteworthy types of invoice discounting –
Let us now proceed to find out about the fundamental differences between a business loan and invoice discounting.
The table below offers a fair idea about the most noteworthy differences between a business loan and invoice discounting. A quick glance makes the concept of business loan vs invoice discounting simpler –
|
Parameters |
Business Loan |
Invoice Discounting |
|
Processing time |
It takes a long time to process a business loan. |
The process is quick and can be completed within a couple of days. |
|
Documentation |
Paperwork is lengthy and requires applicants to complete some formalities offline as well. |
The entire process can be completed online. |
|
Collateral |
It may or may not require applicants to provide any assets as collateral. |
The unpaid invoices act as pseudo-collaterals. |
|
Business vintage |
A minimum of 2 years' of business vintage is required. |
The business in question must be a minimum of 10 months old. |
|
Repayment tenure |
The repayment tenure is flexible and usually over a year. |
Being an immediate cash flow option, it comes with a repayment tenure between 30 days and 90 days. |
|
EMI option |
Borrowers are required to pay the loan amount in monthly instalments. |
Businesses have to repay the amount in a lump sum. |
|
Impact on the balance sheet |
A business loan appears on the balance sheet and is treated as a debt. |
Invoice discounting does not impact the balance sheet as funds are received against accounts receivables. |
|
Interest charged |
Interest is charged on the entire sum. |
Interest is charged on the amount of money that is used. |
|
Final amount |
The amount is decided on the basis of the applicant's eligibility, and repayment capacity. |
The amount is decided as per the invoice value and customer's creditworthiness. |
Businesses should always factor in their requirements and repayment capability before opting for any of these financing options. They should also check the terms of services to understand the difference between business loans and invoice discounting, and consider which option is better for them.
Also, at KredX, you can avail cash flow solutions and resolve all your working capital related challenges. While you are at it, check our growth capital solutions like – revenue-based financing and lease rental discounting to achieve business growth and expansion.