Is Invoice Discounting a Suitable Option for a Business?

As a small business, you might come across your first dilemma while searching for the right funding partner. You can approach banks or other traditional non-banking finance companies (NBFCs) for quick loans but the entire process is time-consuming. Though money market lenders can provide you with instant loans, you might be forced to take loans at exorbitant interest rates. This is when a lot of young businesses opt for invoice discounting as a way to obtain the much needed working capital.

With increasing small business activity and with new businesses being created, the demand for loans is at an all-time high. A majority of small businesses need funds for business growth but unfortunately, traditional lending institutions haven’t kept pace with the demand. That is why new-age Fintech companies are becoming more popular for unsecured loans amongst small businesses. They provide innovative

that are tailored to meet the needs of small businesses, especially the newer ones, and help you avoid the inconvenience associated with invoice discounting or bill discounting.

How invoice discounting works

Most small businesses have to deal with delayed payments, especially those coming from large blue-chip companies. Such companies typically work on a 90-day credit cycle for making payments to small businesses. A business has no control over this delay as it can’t afford to lose goodwill and subsequently business from a large client. However, they do not enjoy a similar leverage with their suppliers and need to pay for raw materials, goods and services within a short span of time. Also, their employees need to be paid salaries on time and they have to manage the day-to-day running costs of their business.

Such payment delays are faced by almost every small business and are one of the foremost reasons for cash flow issues. However, there are different ways through which small businesses can source working capital to keep their business running. They could either opt for a short term loan from financial institutions such as banks or sell their invoices from blue-chip companies for a discount, which is known as invoice discounting.

Taking a short term loan comes with its own set of requirements. First, a bank or a traditional finance company might not be willing to lend to a young business as it entails a significant risk for them. In the absence of a long history of operation, they might ask for collateral. The application process itself is lengthy and the time taken to disburse a loan might be untenable for a small business. Also, a short term loan has to be repaid through monthly instalments and this itself becomes a task to manage. In the case of a default in payment, your credit score gets adversely impacted. Moreover, a business loan shows up on your balance sheet as a debt.

Invoice discounting is a way of getting business finance by selling invoices from blue-chip companies at a discount. Also known as bill discounting, the process facilitates a business to get around 80% of the value of its outstanding invoices up front. The money received through invoice discounting can then be used by the business to meet its working capital needs such as payments to suppliers, salaries to employees, upgrading of machinery and so on.

However, even invoice discounting comes with its own set of challenges. The invoices are purchased by third-party investors who then own the rights to claim payments from the blue-chip companies. Most small businesses do not relish the prospect of a third-party contacting their clients for payments and therefore do not prefer invoice discounting as a process to generate funds. They believe it might lead to a loss of goodwill and impact their future business transactions. So what is the way out? Thankfully, there are solutions from new-age Fintech companies that offer a way around this challenge. Supply chain finance is one of them.

How supply chain finance is more beneficial

While invoice discounting does not sound like a loan and helps you avoid the hassles of managing monthly repayment schedules, the fact that you receive funds of lower value as compared to the total value of invoices means that you already have paid the interest component up front. Moreover, through the process of invoice discounting, you hand over outstanding invoices to a third-party who might harass your clients when demanding payments.

A better way out is to treat your outstanding invoices as assets and use them as a collateral to secure loans from a Fintech lender. This is what supply chain finance or supply chain invoicing is all about. You retain control over your invoices but could use them selectively to raise working capital to meet urgent business needs. The pre-requisites demanded by the lender, such as the time since the inception of the business, its profitability period and bank statement period are more flexible and therefore it is easier to obtain supply chain finance. The process of applying for supply chain finance from a Fintech lender is hassle-free and completely online. You need not stand in queues to submit documents or wait for your application to be approved. In fact, the process of approving supply chain finance by a Fintech lender is faster when compared to taking a term loan from a bank or other NBFCs and you are free to apply anytime and from anywhere. The supply chain finance amount can vary anywhere from Rs 1 lakh to Rs 1 crore and the small business can borrow up to 90% of the outstanding invoice value.

The repayment tenures with supply chain finance are understandably shorter and can range anywhere between 30 and 180 days. You also have the liberty to repay in one instalment without any pre-closure penalty, thus reducing your interest liability. The documentation requirements are also minimal. Digital copies of only a few documents such as VAT returns, bank account statements for the past few months, sales ledger for the last six months, invoices for the past few months and KYC documents are required.

A key benefit of applying for supply chain finance from a digital Fintech lender is that the technology used by them ensures that the whole process is transparent and no hidden charges are levied. Moreover, the loan disbursal process is extremely fast and the advance is credited within a few working days after approval.

You can also apply for collateral business loans at an attractive price in case if you are looking for.

Ankit Shrivastva is a blogger with an experience 8 years and worked for top organisation of India.