One of the most common problems faced by business owners is the maintenance of steady cash inflow. Owing to a shortage of funds, meeting the working capital requirements of the business becomes a struggle. Therefore, daily operations of the enterprise come to a halt. To combat this issue and fulfil short-term needs, entrepreneurs opt for short term credit options, such as invoice financing (receivables financing).
Nevertheless, before an individual understands how the process works, it’s imperative to know the meaning of receivables financing.
What is invoice financing?
Receivables financing is a form of short-term financial assistance, which businesses can avail against their unpaid invoices to fulfil immediate financial needs. Entrepreneurs can utilise the cash to finance the purchase of raw materials and overhead expenses. Therefore, it allows businesses to meet their financial obligations without collecting payments from their debtors. There are two types of receivables financing options- invoice discounting and invoice factoring.
This is how the invoice financing process works:
- A business raises an invoice against the purchase made by a customer.
- The enterprise passes on the invoice details to the financier.
- The financier provides funds worth a certain percentage of the unpaid invoice’s face value.
- In the case of invoice discounting, a business collects the payments from its customers. Nevertheless, if a business opts for invoice factoring, the lender will deal with customers directly.
- The enterprise receives the outstanding amount after the invoice amount is paid in full, post deduction of the service fees previously agreed upon.
Features of receivables financing
Here are some features of receivables financing:
- A business can borrow funds against its own assets (unpaid invoices).
- The business has to pay the financier only after its customer makes the payment.
- This financing option is only available in case of the B2B sales. A business can’t avail of invoice financing if it sells its products and services to the general public.
Owing to the last feature, many businesses are not eligible for invoice financing. Moreover, even if an enterprise deals with another enterprise, the amount of funds that it can raise will be limited to the invoice amount. Ideally, an organisation should opt for a business loan instead.
Benefits of a business loan
Here are the benefits of availing of a business loan:
Entrepreneurs can raise up to Rs.45 lakh by availing of a business loan from a financial institution. Contrary to receivables financing, the amount of credit is not limited to the face value of unpaid invoices. Hence, besides meeting the working capital requirement, entrepreneurs can utilise the funds to expand the operations of their business. Nevertheless, keeping these financial habits to better manage business growth in mind can also help.
Business loans provided by financial institutions come with flexible repayment tenor. Entrepreneurs availing an enterprise loan can choose a repayment tenor of up to 84 months. Businesses with decent high financial capacity can select a short tenor, whereas businesses that are financially weak can choose a longer repayment tenor.
Financial Institutions also extend a credit line facility, known as Flexi loan. It enables borrowers to transfer cash into their account from a pre-approved credit limit as per their convenience. Furthermore, one has to pay only interest as EMIs and repay the principal amount at the end of the repayment tenor. If you’re struggling to maintain steady cash flow, make sure you understand how a flexi loan is the ideal way to meet your working capital needs.
A business loan is an unsecured form of financial assistance. Therefore, business owners are not required to pledge their machinery, equipment, or other assets to gain access to funds.
In addition to these features, business loan providers like Bajaj Finserv extend pre-approved offers, which accelerate and simplify the loan application procedure. These offers can be availed on a wide range of financial products, for example, business loans and credit cards. Check your pre-approved offer now by entering your name and contact details.
An entrepreneur should consider raising funds by availing of a business loan instead of invoice financing and produce the best results for his/her enterprise. Nevertheless, make sure to enquire about the eligibility criteria and documents required as they differ from one financial institution to another.