We know that the numerous government initiatives have led to a new wave of businesses budding up in the country lately. However, the availability of finances is the primary factor to keep these businesses on the sail. One such option to secure funds to keep businesses going is through invoice financing. Want to know more?
Invoice financing, also known as invoice discounting and bill discounting, is a way of borrowing short-term funds from a lender based on the outstanding invoices. Businesses use this method to raise funds to meet their day-to-day needs. This can be considered as an alternative to getting loans from banks.
Based on the invoice raised by a customer, the lender provides up to 90% of the invoice amount as funding. Such financing may be required when the business is short of cash, and their customer would pay the outstanding invoice amount on a later date. Invoice discounting will help the company keep up with purchasing more inventory, keep the business running, and deliver future orders.
Here is a step-by-step break up of how invoice discounting works:
Step 1: A seller sells goods to the customer and raises an invoice regarding the sale along with details, such as date of purchase, number of goods sold, and payment due date.
Step 2: Since this is a credit transaction, the customer may not make the payment until the due date.
Step 3: The seller may require cash at hand to continue serving his new orders.
Step 4: To loosen the locked-up funds, the seller may turn towards a lender who offers invoice discounting facility.
Step 5: Upon verifying the invoice, the lender may agree to pay a certain percentage of the invoice amount, ranging from 75%-90%.
Step 6: When the customer makes the payment, the difference between the actual invoice amount and the amount paid by the lender to the seller, called the ‘discounting fees’ is taken by the lender.
Step 7: Once the seller receives the payment from the customer, the seller must pay the invoice amount to the lender.
You must know that there are two methods of invoice discounting:
Some of the factors on which invoice discounting depend are:
The invoice financing is available for businesses from a wide range of sectors/industries, such as construction, retail, logistics, printing and publishing, transportation, consumer goods, and so on.
Invoice discounting lets businesses keep going without having to worry about cash crunch or applying for tedious business loans. This short-term financing option helps you secure cash without the need for collateral and eases the locked-up money from the outstanding invoices. Instead of chasing your customers for bill amounts, you can let them handle their finances freely and still have some cash at hand for your day-to-day business expenses.
Yes, many lenders in the market accept applications from newly set up small businesses and finance their invoices. The lenders look at the current sales volume of your business and the potential for growth as the significant factors in approving the financing.