How Can Invoice Discounting Help Your Business?

Total financing gap in the SME sector stands at Rs. 2.93 trillions, a research by International Finance Corporation has found. There may be several factors to this fund deficit, the prime reason however shows the traditional collateral based lending by financial institutions behind it. Financial institutions resort to traditional collateral based lending, this leaves many SMEs without funds.

With the conventional financing yielding little results, SMEs have begun to look for alternative solutions to their financing needs. Some of which include Invoice financing, Asset based contributions, Letter of credit etc. So far Invoice financing has evolved as a favorite choice for mobilizing the working capital.

Invoice discounting is a short-term borrowing mechanism. It is a good alternative to improve the company’s working capital and steady the cash flow. This procedure lets the entrepreneurs borrow capital against the sales invoice they raise to their customers, before their customers pay.

Invoice Discounting is fast emerging as SMEs first choice. Here are the reasons why.

Quick Access to Working Capital – Businesses Traditionally, business houses have always sought bank loans to meet their requirement for cash quickly. However, the procedure of bank loans is lengthy and tedious. With Invoice discounting, the money gets disbursed fast as it is given against outstanding invoices. You may extend the credit period of your invoice for 30, 90 or even 120 days, Invoice discounting lets you leverage your invoices for a quick delivery of funds.

Collateral Free Account Receivable Financing – To secure a loan, SMEs need to mortgage their assets. These include factory premises, machinery, equipment and in some cases, even their houses. With Invoice discounting, the loan amount which is disbursed is a percentage of the value of existing invoices which become the collateral. Not only is the risk much lower, but Invoice discounting lends an SME the room to prosper without having to mortgage the assets in the form of collateral.

Discounting Cost – Interest charged on the amount borrowed becomes the cost of the loan. Businesses that pose higher risk are charged more as they pose a greater risk of defaulting. Invoice discounting primarily constitutes two costs: the service fee and the discounting fee. Service fee is the charge one pays to avail the facility which is calculated on the annual business turnover. Cost of borrowing the money is the discounting fee. Invoice discounting is the most cost-effective method of lending money to the borrower. It can quickly spur growth of the revenue in a stagnated business environment and yield good profit margins despite the cost it incurs.

Confidential Invoice Discounting Facility – Invoice discounting involves the facility provider and the actual financier. It is often feared by entrepreneurs that their critical information might get leaked to competitors. However the fact is different and comforting. This process involves complete anonymity. Financial information, business data are bound by a legal framework, ensuring your business interests are never compromised.

Hassle-free Invoice Discounting – Invoice discounting company carries out the entire procedure of discounting the invoices. After handing over the requisite documents, the Invoice discounting company ensures a hassle-free repayment and funding process. Once worry of lengthy paperwork is out, business houses are in a position to continue their primary task of running the company, for which they are set up in the first place.

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