In recent times, invoice financing has gained popularity owing to reasons like instant availability of collateral-free funding and hassle-free application process. At 10% of total credits from financial institutions, invoice or bill financing can make a significant difference in bridging the working capital deficits of businesses.
2) How Does Invoice Financing Work?
5) Differences Between Invoice Factoring And Invoice Discounting
The process of availing funds is further simplified with KredX, one of the most promising invoice financing companies in India.
Invoice financing in India refers to the process through which businesses can avail advances against outstanding invoices from their customers. In turn, businesses pay a certain percentage of this total invoice amount as a fee to their lender.
Through this method of financing, businesses can meet their short-term liquidity requirements by availing a percentage of the value of their unpaid invoices as a loan. These unpaid invoices are considered as accounts receivables. It means that businesses will receive the stipulated amount against invoices raised, but at a later date.
Utilising this method to avail funds, businesses can improve their cash inflow, invest in operations to foster growth, pay their suppliers and employees, and see to a host of other financial needs. Invoice financing helps companies do away with the necessity to wait for customers to settle bills and gain access to necessary funding readily, thus making them a popular form of financing sought by businesses. A customer questionnaire performed resulted in 22% of the respondents favouring bill financing as a convenient mode of instant funding.
Before opting for invoice finance, it is crucial to learn how the entire funding process is carried out. Here’s how it works.
Most businesses usually sell their goods and services to their customers (like retailers and wholesalers) on the basis of credits. It means that customers do not usually pay upfront for such goods and services, and are instead charged at a later date. Now, when the business sells its goods or services to customers, it generates an invoice payable within 30-90 days. Invoice financing is the process through which businesses can avail instant funding against such invoices, by following these steps –
Invoice financing thus allows businesses to mobilise the capital which would otherwise have been held up in unpaid invoices.
As a business owner, you can opt for two types of invoice financing. These are invoice factoring and invoice discounting.
While both these types of invoice finance operate along the same principles, their lending structure is different.
Also known as debt factoring, this particular type of financing enables businesses to avail capital by selling their unpaid invoices to a third-party factoring company.
The factoring company (financier) purchases these invoices for a certain percentage of their total value and takes over the responsibility to collect payments against these invoices.
Invoice discounting, on the other hand, is carried out under confidentiality. In this process, the business’s customers are not aware of the fact that their unpaid invoices are being utilised to raise funds.
Here, the business has total control of the sales ledger and is committed to the task of collecting the outstanding amount against invoices from customers.
Nonetheless, irrespective of the type of invoice finance one opts for, he/she can avail up to three times more cash through it than with other forms of financing.
Invoice financing is a financial solution where businesses use their unpaid invoices to secure immediate cash from a financing company. Here's a simplified example to illustrate how it works:
Company A completes a project or delivers goods to Company B and issues an invoice for ₹1,00,00,000 (1 crore rupees). The payment terms are 60 days.
Instead of waiting 60 days for payment, Company A needs funds right away to pay for operating expenses, invest in new projects, or manage cash flow.
Company A approaches a financing company specialising in invoice financing. It presents the unpaid invoice as collateral.
The financing company assesses the creditworthiness of Company B (the invoice debtor) and agrees to finance the invoice.
It advances a percentage of the invoice value, say 80%, to Company A. In this case, Company A receives ₹80,00,000 immediately.
The financing company charges a fee for this service, for example, 2.5% of the invoice value.
When Company B pays the invoice, the financing company collects the full amount of ₹1,00,00,000.
After deducting the advanced amount (₹80,00,000) and the fee (₹2,50,000), the financing company transfers the remaining balance (₹17,50,000) to Company A.
This example illustrates how invoice financing in an Indian context can provide businesses with swift access to working capital by leveraging unpaid invoices, thereby helping them maintain a steady cash flow.
Eligibility for invoice financing requires a business to possess accounts receivable from reliable customers known for timely invoice payments. While the primary focus is on the creditworthiness of these customers, the company's credit score and fundamental business health are also considered. A business owner's weak credit score may hinder approval from some financing companies, or could lead to increased costs and fees in certain scenarios.
To understand how each of these types of invoice financing function, it is crucial to learn the differences between the two. Following is a table that illustrates how these methods of borrowing against debt differ from each other.
|
Parameters |
Invoice Factoring |
Invoice Discounting |
|
Control and visibility |
Through factoring, the financier manages the credit-control process, as well as the business’s sales ledger. |
With invoice discounting, businesses retain the control of their sales ledger alongside credit control and collect payments themselves. Furthermore, customers are unaware of the invoice discounting agreement between businesses and financiers. |
|
Adjustments made to funds disbursed |
Under this arrangement, businesses are offered funds in advance against individual invoices. Adjustments to the funds disbursed are made daily. |
Under discounting, financiers renounce control over the business’ sales ledger. Thus, any changes to the funding amount disbursed are made on a monthly basis, after businesses provide the monthly reconciliation of their invoices. |
Despite these differences, both these types of invoice financing can be extremely handy funding avenues for businesses irrespective of the industry or sector they belong to.
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The last few years have been witness to the emergence of several invoice financing companies in India. Among them, KredX is India’s leading invoice discounting marketplace that offers working capital for businesses against unclear invoices with completely transparent terms and conditions.
Business owners can easily opt for invoice discounting through our online platform and avail funds instantly against the value of their invoices. Here’s how the process works –
The external investor, in turn, receives payment when the invoice is paid out at the end of the tenure.
With this extremely streamlined process, businesses can avail funds in no time and address their financial requirements without hassle. Thus, with working capital readily available, businesses no longer have to undergo downtime in receiving funds regularly and can keep their cash flow steady throughout.
Invoice financing acts as a lifeline for businesses in India, transforming unpaid invoices into immediate working capital. This financial tool, available in forms like invoice factoring and discounting, allows companies to enhance liquidity and fuel growth without the wait for customer payments. KredX simplifies this process, making it an accessible option for businesses to manage cash flow effectively. Whether for maintaining operations, investing in growth, or managing expenses, invoice financing is a strategic solution that adapts to the diverse needs of businesses, ensuring financial stability and agility in a dynamic economic landscape.
A. An invoice in finance refers to a document issued by a seller to a buyer, detailing the products or services provided and the amount due for these. In financial terms, an invoice represents an account receivable for the seller, indicating money owed by the buyer. This makes invoices important for cash flow management and credit control in business transactions.
A. Invoice financing in India allows businesses to borrow money against the amounts due from customers. This process involves a financial institution advancing funds to a business based on the unpaid invoices. The financing can be structured as a loan (where the invoice is collateral) or through invoice discounting, where the invoice is sold to the financier at a discount. This provides businesses with immediate working capital, helping to improve cash flow.
A. The two primary types of invoice factoring are:
A. Here, the business retains the risk of non-payment by their customer. If the customer fails to pay the invoice, the business must buy back the invoice from the factor.
A. In this case, the factoring company assumes the risk of non-payment. If the customer doesn’t pay the invoice, the business is not liable to repay the advanced funds to the factoring company.
A. Invoice finance is typically used by businesses that have a business-to-business (B2B) model and issue invoices with payment terms. This includes small and medium-sized enterprises (SMEs), startups, and larger corporations across various industries. Businesses facing cash flow challenges due to delayed payments, or those looking to accelerate growth and need quick access to working capital, can particularly benefit from invoice financing.
A. Invoice financing offers several benefits, including improved cash flow, the ability to manage payment cycles better, reduced need for collateral (as the invoice serves as collateral), and the potential to grow the business without the constraints of slow-paying invoices.
A. Properly managed, invoice financing can indirectly improve a company's credit score by providing the funds needed to pay creditors on time. However, it doesn't directly affect the credit score as it's not typically reported to credit bureaus.