Finezza Blog

What Does RBI’s Latest Digital Lending Guidelines Signify?

India’s digital lending market has grown considerably in recent years. Many fin-tech providers are offering easy loans to customers without collateral. While these loans are helpful for some customers who may be unable to get approved loans by a bank, the unregulated nature of this sphere proposed quite a few problems.

Violations of customer data privacy, extremely high-interest rates, aggressive loan recovery methods and other issues have plagued the digital lending sector in India for quite a while now.

So, now the government has decided to intervene and lay down laws to protect customers and provide ethical online lenders with more legitimacy. The new RBI regulations over digital lending will make the process more transparent and reduce the problem of customers ending up with unfeasible loans.

A Brief Summary of RBI Regulations for Online Lenders

These new rules are designed to safeguard consumers against fraud in the digital lending space. People now have the choice of dealing with legitimate Regulated Entities (REs) and Lending Service Providers (LSPs) under the statutory laws.

REs will be authorised digital lenders, and all service providers working with them must be government-regulated LSPs. As the RBI rules start coming into effect, it will be highly beneficial for fin-tech firms to get RE status because customers will also have more confidence in them.

Let’s take a look at the crux of this new press release about digital lending and its intended purpose:

The RBI allows REs to give loans and accept repayment directly to and from the customer’s bank account. There is no need for third-party involvement in this process.
The RE, not the borrower, shall pay all fees, charges, etc., payable to LSPs in the credit intermediation process.
The RBI has made it mandatory for REs to share a KFS (Key Facts Statement) about their online loan/credit product with the customer before finalising the deal.
An extremely important section under the KFS will be the APR (Annual Percentage Rate) which will give customers an idea about the total cost of the loan, including all additional charges.

This is meant to provide customers complete clarity about the kind of financial commitment that they are getting into (misrepresentation is one of the primary complaints against digital lenders).

The RBI has prohibited fin-tech firms from raising a customer’s credit limit without their explicit consent.
As per the new guidelines, REs will be expected to provide all customers with a cooling-off period/look-up interest phase where the customer will have the option to exit the loan contract by simply paying off the loan amount and proportionate APR.
REs (& LSPs engaged by them) will require a nodal officer for complaint redressal per the new RBI guidelines.

Not only this, the information about the grievance redressal officer should be prominently visible on their website so that customers can easily contact them via the website.

The RBI has laid down a 30-day period during which the REs will have to take action for grievance redressal after a complaint has been filed. If no action is taken during this period, the customer has the right to file a complaint with the RBI directly under their Integrated Ombudsman Scheme.
Before collecting any information from the customer, the RE has to take explicit consent from the customer to ensure data security & privacy.

Moreover, a customer can revoke the permission (given to the RE/LSP for using their data) at any point of their contract/relationship with the concerned entities.

The RBI has also stated that all REs and LSPs will have to provide complete detailed information about all digital lending activity (including short-term credits and deferred payment schemes) to companies collecting credit information. There can be no exceptions to this rule, irrespective of the length of tenure of the loans.

You can go through the press release for more details via this link.

Will the RBI Guidelines Be Effective?

The RBI guidelines above show that most of the attention has been paid to increasing transparency between customers and lenders about the digital lending process. This move has been made in light of the recent discovery that more than half the digital lenders operating in the country were involved in illegal practices.

With increased information in the form of KFS and APRs, customers will likely not fall into traps of debt that they cannot recover from. Data protection is also a major concern for the RBI since cybercrime via Digital Lending Apps (DLAs) has now become a significant threat to the safety of Indian civilians.

The RBI has also reserved some rights to gather information about the practices of these lending companies and to take action against lenders that do not satisfy all the regulatory guidelines.

The end goal of this system is to ensure that digital lending becomes a clean and regulated process that Indian citizens can use at their convenience without getting duped out of their hard-earned money. A regulated system will also bring in more customers and benefit digital lenders in the long run.

But these rules are new, and implementation has not yet begun, so customers and lenders need to be careful & avoid legal pitfalls. Customers should seek as much information as possible before signing the loan contract, and digital lenders also need to provide customers with as much standardised, accurate information as they can. The RBI may upgrade these regulations in the future as the digital lending market expands. Lenders must keep an eye out for these updates and modifications to retain their RE status.

Read here to learn about the mobile banking trends to look out for in 2022.

Final Thoughts

The rapid influx of RBI guidelines may have some digital lenders worried, but this action represents a huge advancement in the sector. The government accepts and acknowledges the digital credit market as a legitimate place of business by introducing rules. This simply hints that digital lending will only keep growing and becoming more popular in the coming years.

Right now, it is the most exciting phase of digital lending in India, and early birds that gain RE status and provide efficient service will be able to capture the lion’s share of this growing sector. Contact us for an end-to-end lending solution portfolio.

7 Reasons Why Your Working Capital Lending Operation Needs to Be Updated

Lending Lifecycle Management

Technological advancements have changed lending significantly – banks are integrating fintech and modern loan origination software in their legacy systems. And automation has enabled small players to compete with banks by offering loans at competitive rates. However, since technology keeps changing, you’ll need to update your working capital lending operation to stay relevant.

While automation has helped lenders improve productivity, efficiency, and speed of making decisions, it also requires you to stay aware of changes in technology and customer behaviour.

Let’s further understand why your working capital operation needs to be updated regularly.

7 Signs Your Working Capital Lending Operations Need To Be Updated

The lending market has become competitive; hence your lending operations need to be updated to meet consumer demands and achieve business goals. Keep reading to find out if your lending operations need to be updated or not.

1. Not able to achieve business goals

Are you unable to convert loan applications while your competitors are moving ahead? If yes, your marketing software may not correctly integrate with your loan origination software. To run your working capital lending operations smoothly, your loan software should allow seamless third-party integrations.

Finezza’s loan origination software easily integrates with different APIs for a faster exchange of information and provides an end-to-end solution to achieve your business goals.

2. Lack of credit assessment tools

Credit assessment is an essential process for successful lending. However, usually, lenders manually collect and analyse borrowers’ information to assign a credit score. This process is prone to errors and time-consuming as it can take days or weeks.

With the right automation tool, you can scale the loan processing while ensuring that the decision is accurate. Finezza’s loan origination system uses credit assessment tools to analyse Bank Statement Analysis and Financial Statement Analysis. It also uses a unique scoring model to predict how successfully the applicant will repay the loan.

3. Frequent data security breaches or hacks

With rising cybersecurity threats, breaches, and hacks, data security has become essential. If your lending software is outdated, it will not be able to detect threats, which will lead to frequent breaches.

Since, as a lender, you have a large amount of confidential data, such breaches can affect your business operations and tarnish your reputation. Hence, you need to upgrade to software that complies with all data security regulations and has several checks in place.

Finezza’s uses in-built threat detection features to identify and classify different transactions.

4. Lack of good customer support channels

With the emergence of chatbots and customer support tickets, customers expect quick resolution of their problems. Hence, a contact us page or phone number will not do the job. Customers might get annoyed if they don’t have access to a proper communication medium.

If your customers are annoyed as their issues are not being addressed on time, you need to upgrade to a lending software, which makes it easy for them to communicate with you. Plus, customers should be able to contact you regardless of the medium they use – phone, email, messenger, etc.

5. Lack of end-to-end solutions

Your working capital operations can be affected if your software provides partial solutions. In this case, you’ll have to use several different tools to manage other processes, which can lead to miscommunication.

Hence, opt for lending software that provides end-to-end solutions, such as underwriting, origination, reporting, etc. In addition, it will help you integrate various processes so that your working capital lending operations are automated while requiring minimum input.

6. Your lending software is not user-friendly

There is cutthroat competition with small players competing with banks to offer loans. In this market, the lending software you use for your working capital lending operations needs to be user-friendly.

The borrower will likely leave if the website or app is not easy-to-navigate. The software you use for your lending operations should be easy-to-use, and the features should be easy to understand. Opt for a software that has a simple and intuitive UI and UX, and the user should be able to learn about the features in less time.

7. Not using alternate credit scoring

Alternate credit scoring is used to provide a credit score to first-time borrowers to bring these sections of society within the lending fold. However, since first-time borrowers don’t have previous borrowing history, traditional banks consider their application risky.

On the other hand, modern lenders use alternate scoring techniques to underwrite loan applications of first-time borrowers. Alternative credit scoring tools use machine learning and deep neural networks to analyse the purchase habits of such applicants to identify their creditworthiness.

If you are not already using alternate credit scoring tools, you need to upgrade to identify applicants who seem risky to traditional banks.

Wrapping Up

Lenders with time-consuming, manual, and lengthy working capital lending operations are likely to churn out loans slowly and provide a bad customer experience. Hence, you should regularly update your processes to ensure they are optimised and timely.

Suppose you are not able to achieve your business goals. If you experience frequent security threats and manual processes are slowing down your business, you should invest in a good loan origination system.

Finezza offers robust end-to-end loan origination software, which will cater to your needs and provide your customers with a great experience. Some of the key features of the LOS are automatic document identification, easy integration with APIs, loan eligibility estimator, bank statement analytics, credit assessment tools, 360-degree customer profile assessment, and threat detection checks. Get in touch with us today to learn about our loan origination software.

Supply Chain Financing: How Banks Help Small Entrepreneurs Grow

Lending Lifecycle Management

Cashflows are the lifebloods of businesses. The biggest challenge an entrepreneur faces is raising funds. New businesses must stabilise their fund flows to sustain their operations and scale up, whether it is equity or working capital. Small businesses must manage their receivables and payables meticulously to maintain a comfortable liquidity position. Sometimes, they look for short-term borrowings from the market to infuse liquidity.

Invoice financing is an effective approach for raising short-term capital without accumulating unnecessary debts. Supply chain financing is transforming SME lending in an unprecedented way. Even the banks are enthusiastically participating in invoice funding through supply chain financing routes.

The Liquidity Management Paradox

Liquidity shortages choke the supply chain process affecting everyone in the system. The recent experiences of the economy shut down due to the Covid-19 pandemic have shown us how massive supply chain disruptions can be.

Small businesses, in particular, were in a disadvantageous position. They were in a situation where they had to extend the credit to big B2B clients while paying off the dues to their suppliers on time. Often, these large clients of small-scale suppliers overshot the credit period due to administrational delays. Delayed payments result in missed opportunities. The small firms bore much of the brunt of working capital shortages in the supply chain.

As much as we try to deny it, the reality is that banks hesitate to extend traditional financing to new and small businesses due to concerns of credit risk and the relatively higher cost of servicing small loans. These young firms lack the credentials and credit history necessary to obtain traditional funding. Investors will then consider liquidity ratios to assess the firm’s strength, turning the situation into a vicious circle. With weak liquidity ratios, small businesses have to look for funds elsewhere.

Invoice financing methods effectively address these issues to the advantage of suppliers, buyers, and lenders. They let the small firms borrow against their outstanding invoices.

Supply Chain Finance to Solve Funding Issues

Supply chain finance(SCF) is also called reverse factoring. It is a form of receivables financing in which the buyer, who wants to settle a bill with his supplier sooner than the due date, approaches a lender. The lender or financier pays the invoice value to the supplier. The buyer will then pay for the invoice to the lender, along with applicable interest, when the invoice becomes due for payment.

This process differs slightly from invoice financing or factoring, where the seller/supplier borrows against the invoices generated in the sales processes. The basic difference is that in SCF, the process is initiated by the buyer, while in factoring, it is initiated by the supplier.

Supply chain financing provides many benefits, some of which include,

Quick and easy access to funds tied up long billing cycles
Faster turn-around of working capital
With funds available, increased productivity and efficiency
No predefined payment schedule for the working capital, unlike a business loan
Particularly suitable for entrepreneurs whose businesses are held back for want of appropriate credit products and lack of collateral
Borrowing at a low cost

Role of Banks in Supply Chain Financing

It is estimated that the small-scale suppliers to large Indian firms have an annual unmet credit need worth more than Rs. 15 lakh crore. One can objectively view this as a demand from the SMB industry and an opportunity for banks to widen their lending portfolios.

The Banks participate in supply chain financing in three ways.

1. Direct lending through invoice funding – Banks like SBI, Bank of Baroda, PNB, IndusInd Bank, and ICICI have already forayed into the SCF space, offering invoice financing services. Many banks offer digital platforms to their corporate customers to connect with their suppliers and dealers. They offer invoice discounting facilities for these suppliers/ dealers on approved bills by their clients.

2. Bidding through TReDS E-discounting platforms – Trades Receivables Exchange Discounting System (TReDS) is a digital system launched by RBI in 2018. TReDS allow MSMSE sellers (for factoring) and buyers (for reverse factoring) generate factoring units of invoices for bidding on e-discounting platforms. Three e-discounting platforms are mandated to operate TReDs- RXIL, M1xChange and Invoicemart. Many banks participate as financiers on TReDS platforms, reaching out to entrepreneurs needing short-term funds.

TReDS platform Invoicemart has IDFC Bank, Axis Bank, Bank of Baroda, Standard Chartered, and State Bank of India among their financiers. As per the latest update, HDFC Bank entered into a tie-up with M1xchange last month for onboarding to TReDs.

3. As collaborators in providing TReDs e-discounting platforms– Banks also occupy the supply chain financing space as collaborators providing and operating the TReDS platform. For instance, the Receivables Exchange of India(RXIL) is a joint venture between the Small Industries Development Bank of India (SIDBI) and the National Stock Exchange (NSE). Similarly, Invoicemart is a joint venture between mjunction services and Axis Bank. The third and last one in this group is M1Xchange by Mynd Solutions.

How TReDs Operate

TReDS operate as follows:

MSME buyers and sellers create ‘factoring units’, invoices or bills of exchanges that will be traded on the platform.
Financiers bid for the factoring unit. The buyer or seller selects the best bid, as the case may be.
The Financier pays the invoice value to the MSME seller at an agreed discount rate.
The buyer pays the financier for the invoice later.

The Road Ahead

Prospects look promising for small businesses in India. Now is the time for Banks to gear up and lend an extra hand to the sector. Extending credit is one way. But they can do more by acting as a catalyst in the supply chain finance scene. Banks can mobilise other lenders, such as NBFCs, provide advisory facilities, support regulatory frameworks, and provide technical support by integrating fintech into the system to contribute to the overall growth of supply chain financing in India.

Banks can use the innovative Lending Lifecycle Management Platform from Finezza to streamline their credit portfolios. Our comprehensive Loan Management, Loan Origination, and Collection Delinquency Management programs effectively manage your asset products, saving time and effort. Contact us today for more details.

Can B2B BNPL Potentially Unlock Growth Opportunities for Companies?

Lending Lifecycle Management

B2C (business-to-consumer) BNPL has been growing in popularity among millennials, particularly Gen Z. Millennials often lead the B2B buying process in their workplaces, just like in consumer markets. With the growing popularity of eCommerce and increased demand for digital payments in the B2B marketplace, B2B BNPL has emerged as a natural fit for customers looking for more credit options.

In this article, we will witness how BNPL, having revolutionized consumer finance in recent years, is now set to undertake a similar transformation in the B2B lending space.

What is BNPL?

Buy now, pay later is a fintech solution that enables shoppers to pay for everyday products by splitting their purchases into three or four instalments with little to no interest, giving them instant credit.

Emerging as an alternative credit payment approach, BNPL aims to meet the need of younger consumers who often have a limited credit history and low credit scores to pay for items on instalment plans.

BNPL also helps drive higher average order volumes, speed up cash flow, enhance customer service, and boost business growth.

BNPL providers charge retailers higher transaction fees because of the risk. It marks the greatest disruption in consumer finance since credit cards.

What is B2B BNPL? Can it repeat the success of B2C BNPL?

B2B credit is not a new concept, as invoice financing already exists through which most businesses can already pay for an item or service at a later date.

As business models are increasingly looking to implement online infrastructure like eCommerce sites, BNPL solutions will need to be accessible and integrated at the point of sale and purchase.

Unlike the mass market of B2C BNPL, companies offering B2B BNPL will also need to ensure that their solutions are flexible to satisfy each borrower’s individual needs, which will lead to the rise of B2B BNPL.

Factors that led to the rise of B2B BNPL

Modern-day businesses operate within a different technological, financial, and social context, leading to the rise of B2B BNPL.

The different factors which led to the rise of B2B BNPL are:

1. Rise in financial technologies

Granting credit was time-consuming, requiring manual checks typically done offline by businesses. There could be a delay of several days in this process.

The rapid adoption of open banking solutions, which enable fast and accurate credit checks, and automated KYC, simplifies the entire lending process, allowing lending decisions to be made in minutes.

2. Success of the B2C model

The success of B2C BNPL has prompted businesses and lenders to consider how they can emulate the BNPL model in the B2B world while improving obvious drawbacks such as lending to people with poor credit histories.

3. Economic impact of the pandemic

Global restrictions on economies have devastated SMEs that face pressure on cash flow and capital to survive and expand.

B2B BNPL has the potential to revive the strained credit lines and give businesses a way to pay their suppliers within a reasonable period.

Benefits of B2B BNPL for companies

The pandemic economic climate has been difficult due to supply chain disruptions and labour challenges. The flexibility of BNPL payment options can increase customer loyalty and profitability.

Beyond that, there are a lot of benefits of B2B BNPL:

1. Increase in size of the purchase

Buyers can make high-value purchasing decisions when payments are spread out over three or four months. The merchants who provide this type of financing can expect to see increases in average purchase size from their customers.

2. Predictable cash flows and business growth

BNPL allows the merchants to get paid upfront. Like credit card companies, the BNPL solution providers ensure merchants receive payments within 24 to 48 hours with zero chargeback liability.

A near-instant payment means more cash flows into the business’ bank account. The business has the freedom to take on initiatives that drive business growth through intelligent business planning, cash allocation, and purchasing. As a result of more predictable, reliable payments, the business can operate more efficiently in the following ways:

Paying expenses on time
Purchasing inventory
Paying debts
Reinvestment in the business
Forecast for the future

3. Enhanced customer loyalty

Customers may be more loyal to companies that allow them to hold onto their cash for extended periods.

Offering this option is like doubling down on the customer service millennials want since BNPL is integrated with eCommerce and digital payment options.

Challenges in B2B BNPL for the Companies

The B2B commerce opportunity is about three times larger than the B2C opportunity, with trillions of dollars of payment transactions already flowing between businesses worldwide.

However, even though BNPL has massive potential in B2B transactions, the complexity of lending at the point of sale is higher than in B2C, so B2B is taking longer to scale.

Some challenges are:

1. Lengthy and expensive process

The companies must undertake various credit and enrollment checks, underwriting, reconciliation into accounting systems, multiple payment streams, and so forth. This leads to an added cost for the businesses to incur for providing credit services to their customers.

2. High-value, complex transactions

B2B merchants are typically involved in high-value, complex transactions, often involving transactions over ₹100,000, ₹500,000, or more.

Also, providing a ₹30 lakh loan at checkout within seconds is much more difficult than giving a 3000 rupees loan to a consumer buying a pair of sneakers.

How Finezza Can Help You Overcome These Challenges

In B2B BNPL, customers’ businesses and identities must be verified, credit limits are allocated, payments are processed, collections are managed, and refinancing options are offered.

The best way to handle such a complex task is to work with Finezza, which has developed a wide variety of products, including

As a result, B2B marketplaces can collect information about buyers and sellers, including transactions, inventory, and company growth trends. They can extend credit using the collected information, including whether they have been delinquent on payments or have made erratic purchases.

Wrapping up

The B2B BNPL FinTech model holds great promise to provide credit to almost every business sector and overcome post-pandemic supply line disruptions.

With the right infrastructure partners, B2B marketplaces can shift their transactional volumes to BNPL, offering customers a low-cost way to finance purchases and sellers a safe, data-driven way to collect payment.

Shaky Future of Credit Cards: Will Virtual Credit Cards Take Over the Market?

Loan Origination System

It’s no secret that credit cards have faced a fair share of problems in the past few years. The global recession caused many people to tighten their belts, and credit card companies were some of the first to feel the pinch. Fees increased, interest rates rose, and many people found themselves struggling to keep up with their payments.

As we are trying to overcome the recession, new threats are on the horizon for the credit card industry. One of the biggest is the rise of virtual credit cards. Most people have heard of them, but few understand how they work or why they’re becoming popular. So, let’s take a closer look at this new technology and what it could mean for the future of credit cards.

What Are Virtual Credit Cards and How Do They Work?

A virtual credit card is a credit card that exists only in cyberspace. It’s not a physical piece of plastic you can carry around in your wallet. Instead, when you sign up for a virtual credit card, you’re actually getting a credit card number, expiration date, and security code that’s different from your regular credit card.

Almost all Fintech companies have been issuing virtual credit cards to their customers. You can use it to make purchases online or over the phone and set up recurring payments. Not only that, but you can also use virtual credit cards to shop anywhere the BNPL model is accepted.

Why Are Virtual Credit Cards Becoming So Popular?

You might be wondering why virtual credit cards are becoming so popular. After all, we’ve been using physical credit cards for decades now.

So, what’s the big deal? There are a few reasons why virtual credit cards are starting to gain steam. Let’s take a look at some of the most important ones:

1. Much Larger Acceptance for Payments

One of the main reasons why these digital cards are gaining popularity is that they can be used for payments almost anywhere. Physical credit cards offered by banks use Master-Visa Payment rails. However, virtual cards use UPI, which is widely accepted for P2P and P2M payments in India.

With this, you can make payments to anyone with a UPI-enabled bank account using their unique virtual ID.

2. Security Concerns Are Driving People to Virtual Credit Cards

In recent years, we’ve seen several high-profile data breaches that have affected millions of people. As a result, people are becoming increasingly concerned about the security of their personal information. And for a good reason!

Digital cards are much more secure than traditional credit cards. With a virtual credit card, your information is stored on a secure server instead of in your wallet, where it could be lost or stolen. The MPIN serves as a safety check even if the phone is stolen. It’s no wonder that people are gravitating toward virtual credit cards for their security.

3. Easier Buy Now, Pay Later (BNPL) Options

One of the most popular uses for virtual credit cards is Buy Now, Pay Later (BNPL) services. These services allow you to make a purchase and spread the cost over a period of time. They’re becoming increasingly popular, especially with millennials.

Virtual credit cards make it easy to sign up for BNPL services because you don’t have to share your credit information with these organisations. Also, the younger generation doesn’t have a viable credit history, in most cases, which limits their ability to use physical credit cards. So, virtual credit cards give them a way to make purchases and build up their credit score in the form of BNPL.

4. Faster Approval Rates Without a Credit Check

While physical credit cards require a credit check, virtual credit cards do not. This is because virtual credit cards are issued by fintech companies, not banks. So, they’re not subject to the same regulations. This makes virtual credit cards much easier to obtain.

Also, applying for a credit card is a lengthy process. You have to fill out an application, wait for a credit check, and then wait for the card to be delivered. With a virtual credit card, you can get approved within a period of 24-48 hours which is a huge time saver.

Will Physical Credit Cards Eventually Become Obsolete?

Due to legacy business models, underwriting methods, and high operational costs, current credit cards only serve 30 million salaried employees. On the other hand, India has 940 million debit card users and over 450 million PAN card holders with some credit history that can be serviced with digital cards.

However, it will take time for virtual credit cards to take over the market completely. That’s because people are creatures of habit, and change doesn’t come easy. Also, credit cards do have the advantage of significantly higher card acceptance at merchants worldwide. Visa and Mastercard have established a truly global point of sale and online payment ecosystem, with their cards accepted by millions of merchants worldwide.

It will take time, but eventually, people will see the advantages of virtual credit cards over traditional credit cards. And when that happens, we could see a complete shift in how people pay for things.

However, the Master-Visa payment ecosystem is still the go-between two transactions in some cases, so it may be a long time before we see the death of the physical credit card.

How Can Fintechs Better Manage Risk in a Digital World?

Fintechs are playing an increasingly important role in the financial services industry. They’re offering innovative products and services, such as virtual cards, to make it easier for consumers. But as they become more entrenched in the industry, they also face new risks.

Finezza provides a wide range of products to financial institutions such as banks, NBFCs, and other lenders. It tracks and manages credit applications, expedites the processing of KYC documents, and streamlines the lending process. This helps identify loan defaulters and minimise risks.

So if you want to make better financial decisions faster, contact us right away!

How Is Loan Against Invoices Helping SMBs and Their Suppliers: 5 Key Points

Lending Lifecycle Management

Micro, small and medium businesses (MSMB) is India’s second largest employment generator and constitutes nearly 30% of our GDP. Like other businesses across the globe, the Indian SMB industry also faced massive crises during the pandemic. But the sector quickly recovered and has shown resilient growth ever since.

A vulnerable point for the small businesses, which was revealed with the Covid-19 experience, was the disruption in the supply chains. The operational interruptions were due to liquidity shortages along the chain. The cash was tied up in inventory or unfinished goods as distribution was halted.

Positive cash flow directly impacts the growth and health of businesses. The timely availability of working capital has always been a pain point for small firms. A loan against invoices effectively solves this problem.

Loan Against Invoices and Liquidity Management

Liquidity measures a firm’s ability to raise funds to meet its short-term debts. Robust working capital management keeps the business afloat during tough times and helps them grow in adverse market situations.

For many reasons, small and medium businesses often find fund management difficult. While credit sales are a fillip for businesses to sustain in a competitive market environment, long billing cycles tie in funds causing the firms to look for cash elsewhere. They have their liabilities to meet and the lag between making payments, and getting paid can affect the health of the businesses.

In such situations, a loan against invoices becomes a convenient option for raising funds. Invoice financing or accounts receivables financing is a funding option for B2B trade, where firms can borrow against their unpaid invoices. They can repay the loan once their clients settle the sales. The lenders will charge a reasonable fee or interest for the loan. More than a credit facility, this type of funding can be seen as receiving a future income in advance.

View our article here about the benefits of invoice financing for small business owners.

Let us see how the loan against invoice funding is helping small and medium businesses and their suppliers.

1. Easy source of fast cash

Loan against invoices is the most convenient and cost-effective option for raising short-term working capital. The procedures are simple compared to other lines of credit, and the funds will be available in 2-3 days. The advantages include basic documentation, non-requirement of collateral, quick appraisal, and faster credit disbursal.

This facility is particularly suited to start-ups and small businesses which do not have a sufficient credit history to apply for formal credit. Firms can maintain their cash flow while building a good credit score since availing of invoice finance will not majorly disrupt balance sheet quality.

Many small businesses are the suppliers of big industries, e.g., a small manufacturer supplying nuts and bolts to automobile giants. Sometimes in such cases, the payment processing will take time and may stretch a few days beyond the usual credit period. In such situations, SMBs are at a disadvantage since they have limited bargaining capacity. With invoice financing, they can liquidate the receivables and ensure cash flow for daily operations.

2. Enhanced liquidity, fixing supply chain disruptions

Liquidity is the oil that keeps the supply chain machinery running smoothly. The global crisis that followed the pandemic brought valuable insights into the magnitude of supply chain disruption due to unforeseen events. Lack of liquidity will create bottlenecks in the system, affecting everyone along the line- suppliers, manufacturers, distributors, sellers, and consumers. Loan against invoices helps to circumvent such situations by pumping liquidity into the supply chain system.

3. Increased sales turnover, hence better productivity

Invoice financing improves the cash flow position by making the funds available earlier. Working capital is therefore available for increasing production or investing in growth. Businesses can settle their payments sooner and buy more raw materials for further production or more stock for sales. Increased production may lead to more sales and improved revenues. Further, increased sales will generate invoices that can be used again for financing, creating an incremental cycle.

4. More flexibility while opting for credit

In loans against invoices, the companies have the flexibility of availing only the required credit and only at times needed. Moreover, they have the freedom to choose specific accounts or specific invoices to finance the credit.

Additionally, invoice financing can function as fund sources for servicing existing term loans or cash credits. Companies can have better control over their credit position and its impact on their financial statements. Opting for invoice factoring or discounting will not add to the liabilities on the balance sheet. Also, the debt due through invoice finance is cleared quickly.

5. Better trade relationships between businesses and suppliers/vendors

Loan against invoice helps reduce many hiccups in the supply chain system due to cash shortages. Sellers needn’t worry about recovering outstanding payments. Funds are readily available, improving cash positions. Businesses can therefore provide extended credit periods to their clients.

As dues to suppliers are paid sooner, they might provide discounts to small businesses that are their clients. For budding businesses, timely settlement of accounts payable will help to build their creditworthiness and overall goodwill.

Invoice financing maintains confidentiality (unless the firms opt for invoice factoring where they sell accounts receivables to the lender), as the customers and vendors needn’t know about the arrangement. The firm, not the lender, will be responsible for that particular sales account and receivable recovery.

Closing Notes

Loan against invoices helps to unlock the cash blocked in credit periods and makes it available for immediate use by businesses. For SMBs, and their suppliers, in particular, this arrangement helps to manage the invoice cycle better and address cash shortages.

While traditional forms of credit are advanced for specific purposes like purchasing machinery or raw materials, invoice financing places no such restriction on the end use of funds. It can be used for anything from paying employee salaries to covering promotional expenses. A loan against invoices is a financing option helping to deal with many issues in the supply chain framework.

Finezza brings to you smart solutions for organizing and streamlining your lending procedures. Our Loan Organization Software and Loan Management Software help you automate the credit workflow right from KYC processing to tracking repayments. Contact us today for more details.