Working capital is one of the most crucial financing factors that pave the way for a successful business. In this regard, MSMEs typically suffer the most due to a lack of sufficient working capital. One of the reasons behind is the numbers of unpaid invoices at the month’s end. Since invoices are accounts receivable for businesses, a substantial amount of money gets trapped in unpaid invoices.
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However, invoice finance is one of the most efficient ways to tackle this funding hurdle. Several top financial institutions in India offer loans using those invoices as collateral. It enables entrepreneurs to maintain their business’s cash flow and carry out daily operations.
However, just like any other borrowing option, invoice financing also has its pros and cons that borrowers need to consider while availing this financing option.
Pros of invoice financing
Following are some of the merits of invoice financing, a type of business loan that allows businesses across sizes, scales and age to rely on this borrowing option.
- Prompt and efficient
One of the typical advantages of invoice financing is that it requires only a day or two to get the loan disbursed, making it apt for a short-term working capital requirement. In this regard, it closely resembles channel financing, which also provides monetary aid to carry on daily business operations without any hassle.
- No long-term business asset required as collateral
Most MSMEs cannot borrow adequately due to a lack of suitable collateral. However, with invoice financing, borrowers can draw a considerable amount using those unpaid invoices as collateral. Top lending institutions in India offer almost 75 to 85% of the invoice amount as loan. Moreover, lenders like Bajaj Finserv extend a loan amount up to Rs.30 lakh as invoice finance to make high-value funding conveniently accessible.
They also provide pre-approved offers that make the entire loan application process effortless and time-saving. Such an offer is available for several financial products as well, such as business loans, personal loans, etc. You can check your pre-approved loan offer simply by entering your name and phone number.
- Interest-free borrowing
Unlike a standard business loan, invoice finance does not follow the principle of interest levy. However, lenders charge some predefined fees on every realised invoice.
- Credit score is of minimum consequence
Another advantage of invoice finance is that lenders won’t check the credit score or financial records of a business to extend the advance. Instead, they will check the same for customers who are yet to pay the invoice amount. Moreover, they also check the value of invoices before sanctioning the loan.
- Immediate fund availability
Almost all businesses, including small ones, require additional funds to meet diverse financing needs like the purchase of new machines, payment of salaries, taking up new projects, and so on. Thus, to manage these essential expenses, you must follow some concrete steps that would help your business raise finance.
In this regard, invoice financing can prove to be a great option for an immediate fundraising requirement.
Cons of invoice financing
Besides the pros, a few cons of this method of financing still exist. Following are some of them.
- Customer dissatisfaction
Though invoice finance does not require a credit score check of a business owner, the lender will review the credibility of customers. Hence, credible and loyal customers may not feel comfortable with this entire process, affecting their loyalty towards a business.
Since factoring agencies are not collection agencies, if customers default on paying the bills in time, you as a business owner will be responsible for such payment. It means the lender will collect the amount from you for any such default.
Several lending institutes charge nearly 1% to 5% of the total invoice amount as processing fees for such funding. This charge may vary; and thus, you should compare different lenders before settling for one.
Now, along with knowing about the pros and cons of invoice financing, you should also gain a clear idea about how much working capital your business needs. It will thus allow you to borrow accordingly without piling up your loan debt.