Financial challenges like delay in payments, urgent need for inventory, etc., are commonplace, and every entrepreneur has to face these challenges to attain the success that everyone looks up to. In the midst of these difficulties, they resort to various short-term and long-term credit options for assistance.
One such notable mention is invoice financing. It is a short-term loan that financiers extend against unpaid invoices to meet any liquidity crisis.
Benefits of invoice financing
Here are some notable benefits of this credit method that makes it so popular –
- Solve cash flow problems
Unlike different types of business finance, this debt instrument offers more flexibility in terms of meeting urgent monetary needs. Since it releases unpaid invoice, companies can now cover their other expenses or invest the funds elsewhere.
Moreover, with financing option like this, firms can now improve their working capital and their financial foothold.
- A quick funding option
Credit against invoices is a quick financing method, and individuals can access the funds within 24 hours. Hence, entrepreneurs can now meet their urgent business needs without any hassle.
- Easy to qualify
This sub-type of business loan offers extremely flexible eligibility criteria. Since funds are released against unpaid invoices, most companies with a reputed credit profile can easily qualify for this credit type.
- Loan amount is not fixed
Since the loan is approved against invoices, the loan amount here has no upper limit. It allows entrepreneurs to avail the required quantum and meet any business purpose that might arise.
5. Flexibility in repayment
With the help of invoice financing, individuals have access to funds that offer easy repayment terms. Usually, it varies from one lender to another, but the vendor payment cycle primarily decides this tenor, and borrowers have the freedom to choose it.
Additionally, debtors also have the freedom to select the mode of repayment. They can either opt for an EMI system, part payment or one-time payment option.
- No restriction on usage
Since there are no restrictions on the usage of funds, individuals can meet an array of business expenses. They can use it to manage the hidden costs involved in running a business.
Financing against invoices also reduces the risk for lenders, allowing them to offer better loan terms. Moreover, leading financial institutions extend the online application process that aid individuals to avail of a loan faster. Nonetheless, businesses that do not have sufficient unpaid invoices can alternatively opt for a business loan to meet their financial requirements.
Financial institutions like Bajaj Finserv extend pre-approved offers to their current customers that expedites the application process for business loans. Offers like these are also available on financial products like personal loans, credit cards, etc. Also, individuals have the option to check their pre-approved offers online by submitting their essential contact details.
How does invoice financing work?
This credit method has two distinct ways of working – factoring and discounting. Here are the details –
- Invoice factoring: In this method, a firm approaches a lender to sell its outstanding invoices. Considering everything, financiers may provide 75% to 80% of the total value upfront to the company, and if they receive full payment of those invoices, then the lender will repay the remaining amount.
- Invoice discounting: On the other hand, in the case of discounting method, an organization receives a lump sum against its unpaid invoices.
The only difference between the factoring and discounting method is that, in the case of factoring, the financial institution is in charge of collecting the payments for these invoices. However, for a discounting method, borrowers need to gather the payments and make repayments. Invoice financing offers a quick funding solution, allowing borrowers to meet financial shortfalls without any hassle, and revive a struggling business.