According to the International Finance Corporation, the total financing gap in the SME industry is Rs. 2.93 trillion. One reason for this gap could be that financial institutions mostly cater to the demand of traditional collateral-based lending, leaving out many SMEs dry and without funds. SMEs hence turn to alternative financing solutions like invoice financing, asset-backed contributions, letter of credit and others for their capital requirements. Out of these, Invoice Financing is their first choice as a working capital financing mechanism.
By definition, Invoice discounting is a form of short-term borrowing often used to improve a company’s working capital and cash flow position. Invoice discounting allows a business to draw money against its sales invoices before the customer has actually paid.
5 Reasons Why SME’s Choose Invoice Discounting
Quick access to working capital– Businesses that need cash generally tend to apply for bank loans, but invoice discounting is preferred by those businesses that require cash more quickly than they are likely to get from banks. The money is specifically levied against outstanding invoices, which means that the financier is simply advancing the delivery of the funds owed by businesses. In other words, businesses get access to funds they are liable to get after 30, 90 or even 120 days. This helps in advancing business operations.
Collateral free account receivable financing– SMEs who are looking to borrow from Banks and Financial Institutions often have to secure their loan against a collateral like business or personal assets, such as equipment, machinery, or perhaps even their home. With invoice discounting, on the other hand, the collateral is built into the agreement. The money that is lent is a percentage of the value of an existing invoice, and it is this that acts as security. This means that invoice discounting poses a much lower risk for those that it is available for.
Discounting cost– The cost of a loan is essentially the interest that’s charged on the amount that business owners borrow. High-risk businesses are likely to be charged more as they pose a greater risk of defaulting. Invoice discounting has two associated costs: the service fee and the discounting fee. The service fee is a charge made for availing the facility and is usually a percentage of the business annual turnover. The discounting fee is the cost of borrowing money. Despite there being two charges, invoice discounting offers by far the more cost-effective lending facility ensuring businesses earn significant profit margins and see a growth in their revenue.
Confidential invoice discounting facility– Some businesses fear that as Invoice Discounting facilities involve multiple parties like the facility provider and the financier, their information might get leaked to competitors. But the truth is that complete anonymity is maintained until the end of the process involving their business data and financial information with a strong regulated legal framework around it.
Hassle-free invoice discounting– The entire process of discounting invoices is carried out by the facility provider or invoice discounting company. Once Businesses give their documents, then the facility provider ensures that the funding and repayment process run seamlessly. This way, businesses get to concentrate on their own operations rather than worry about the paperwork.
KredX is India’s first Invoice Discounting Marketplace. Visit www.kredx.com to know more.
Also read: What is Invoice Discounting?