How does invoice financing help small businesses and suppliers?
There are various segments that contribute to the economic development of India. Similarly, micro, small and medium-sized enterprises (MSMEs) contribute 30% of the country’s GDP through national and international trade. The meteoric rise of MSMEs in the country is a positive sign for future growth, as the number of small and medium enterprises has grown at a CAGR of 18.5%. from 2019 to 2020. Loans disbursed to MSMEs have been a staggering Rs. 9.45 trillion in the current fiscal year, showing a massive 40% increase over last year. The high credit accorded to this sector indicates the importance attached to it by the government.
Small and medium enterprises are truly the backbone of the economy. Therefore, they must be supported and protected from obstacles that hinder their proper functioning. One of the biggest problems they face is lack of access to credit. No less than 27 to 29 million MSMEs do not have access to formal credit facilities. Credit is the lifeline for businesses to thrive and operate efficiently; therefore, the issue of lack of credit must be addressed.
Invoice financing to the rescue
Invoice financing is a financing instrument used to meet a business owner‘s immediate working capital needs. When owners want to maintain sufficient cash flow while growing their business and buying new stock, they can use bill financing from a bank, NBFC, or new-age fintech companies. New age lenders have been able to innovate new programs up to the last mile supply chain system with the help of manufacturers. It creates a win-win situation for all stakeholders. Manufacturer can have more stock, distributors and retailers can buy more stock with Invoice finance support. Few manufacturers and distributors are also willing to offer cash rebates to those who plan to take advantage of this offer and return the money to the lender during the free credit period. Smart borrowers are able to pay zero interest despite using the bill finance facility.
Here’s why it can be a tool that can be a stepping stone to success for a small business:
Cash flow improvement: Having unpaid bills has never been a hallmark of a successful business. But times have changed now. Invoices can be collected without disrupting the flow of money in small businesses. Invoice financing offers the flexibility of availing a credit facility without any hassle. Most of the new age lenders also extend this facility as an unsecured facility on the convenience of providers. Funds put them in a superior position to control expenses, cash inflows, and help them take advantage of opportunities as they arise. This facility becomes super useful for them during peak season.
A constant companion and customization according to your needs: With invoice financing, businesses can choose the cash they need. They can have full control and only access the amount of funds they need, whether it’s part of the bill or the entire bill. Not only that, but they can also decide when exactly they want the bill to be funded. Since these funds are short-term loans, they are usually repaid within a month. The borrower also has the option of churning the credit limit multiple times during the term of the facility. Most lenders create a line of credit for at least 12 to 18 months as a revolving line of credit.
A transparent process and simplified reimbursement options: new age Invoice finance lenders follow flexible eligibility criteria for their clients. A foolproof supply chain finance system is structured to provide up to 90% of invoice value. A flexible repayment plan, which can vary from 15 days to 6 months, is attributable to the size of the company and the repayment cycles, which makes it a very practical instrument for many companies. There is also an option to repay the lender in a lump sum to avoid additional interest charges.
Mitigation of the risk of bad debts: Bad debts can be a serious handicap for a business. Unpaid dues worth Rs. 15 trillion reflect the daunting reality on the ground for MSMEs in this country. Invoice discounting can help mitigate these bad debts with their credit checks on debtors. They have professionals who deal with these defaulters and if the program is done in consultation with the manufacturer, the risk of delinquency becomes almost negligible.
Money in the bank in no time: Funding bills can be fast. It does not require any important documents to acquire the loan. Once a connection has been established with a billing funds provider, the line of credit can be created with minimal documentation and paper documents. The manufacturer/distributor receives the money within 24 hours of completing the loan document. The digital revolution should also reduce this delay in the days to come.
No warranty needed: Invoices presented to the lender for financing are the only assets that are normally used as collateral in the case of invoice financing. Companies that are new or have a small turnover with fewer assets can take advantage of this advantage. The unsecured nature of the credit facility makes the process faster and smoother.
Since small businesses are the lifeline of our economy, they have been managed very diligently by the government through funding and promotion. The problems they face are also evident. Not qualifying for formal credit is one of them. Financial tools like invoice-based financing can help MSMEs leapfrog their industry clout and focus on their goals. Short-term liquidity and a reduced working capital cycle can be a boon for businesses, and these instruments help to do the same. The product is becoming popular every day and lenders are ready to explore this untapped space for the next level of credit growth.
The opinions expressed above are those of the author.
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