Businesses of all sizes experience cash flow challenges at some time or another. One unique circumstance is when a business receives a sizable order from a client. However, in many cases, they cannot fulfil the order due to a lack of funds to produce the product.
For instance, they may be unable to order raw materials due to cash flow challenges. If the business is unable to raise the funds quickly, it will lose the client to a competitor. Micro, small medium-size enterprises (MSMEs) often face this issue, especially in the early stages of the growth journey.
According to a Financial Express report, of the 64 million MSMEs in India, only 14% have access to credit, which results in a $530 billion credit deficit.
Having said that, large-scale businesses may also require funding when faced with a similar situation, especially when scaling fast and sizeably. The inability to fulfil an existing order is a missed opportunity for businesses and lenders who seek new ways to fill credit gaps and grow revenues.
In this scenario, invoice financing by a credible, innovative lending partner can shift the narrative and help businesses meet their credit needs at this critical time.
Let’s understand how invoice financing works, the benefits for businesses and lenders, and how lenders can make data-driven underwriting decisions.
What Is Invoice Financing?
Invoice financing refers to a B2B credit access model in which business borrowers can access funds against outstanding invoices from client/s.
The invoice is typically associated with an order/s of a larger ticket size placed by the client.
In accounting terms, it will be considered as accounts receivable at a later date once the order is fulfilled. However, the business cannot fulfil the order without access to funds.
Rather than wait to generate funds independently, businesses can access a loan and fulfil new orders promptly. Businesses that manufacture or produce products and services need access to such a facility, especially as they start to scale. They can take advantage of having customers on hand.
Main Benefits of Invoice Financing
Invoice financing comes with several advantages for both borrower businesses and lenders, as follows.
a. For Businesses
- Credit access: The first advantage for businesses is that they can access credit promptly and fund purchase orders during a cash crunch. Due to the invoice financing opportunity, they can acquire new customers and retain existing ones. Businesses no longer need to wait for customers to settle accounts receivable to deliver fresh orders.
- Sustainability of operation: It can be challenging for businesses to sustain operations without access to cash to fund related activities, too.For instance, by improving cash flows, businesses can also honour other commitments, such as paying suppliers and employees.
b. For Lenders
- Revenue streams: There is a growing demand for credit access, especially as businesses in the MSME market grow their client base. Lenders can capitalise on this opportunity by strengthening their invoice financing capabilities and developing a fresh revenue pipeline.
- Scalability: The larger the invoice value, the higher the potential for lenders to grow revenues. Hence, lenders can also target large-scale businesses looking to meet a growing demand for their products at scale.
Invoice Financing: Key Challenges for Lenders
No doubt, there’s a growing need for invoice financing among businesses. In turn, this is an opportunity for lenders. However, as is the case with any loan product, this model comes with two specific challenges.
1. Inability To Gauge Risk Profile
Accessing the risk profile of borrowers is a key challenge when they do not have a credit history or possess any assets. Hence, lenders cannot accurately predict whether the borrower will be able to repay the loan.
2. Unable To Serve Diverse Needs
The invoice financing needs of a direct-to-consumer food brand are significantly different from those of a mass electronics brand. Hence, the loan structures may also need to look different.
However, lenders tend to offer a one-size-fits-all product, which is irrelevant to a spectrum of potential borrowers. Lenders must be equipped to serve diverse needs.
How Technology Powers Invoice Financing
With access to the right technology, lenders are in a position to address key challenges and make data-driven invoice financing decisions.
1. Quick Turnaround On Invoice Financing Loans Applications
Cloud-based lending management software comes with multiple advantages for lenders. For instance, this is a comprehensive financial statement analysis solution which allows lenders to swiftly and accurately assess a borrower’s risk profile.
The software also enables lenders to automate the entire loan management cycle, thus enabling lenders to respond to invoice financing requests quickly and accurately.
2. Predict Risk Profile
This automated, artificial intelligence-powered software can analyse a borrower’s financial status and predict future behaviour based on historical and current data.
For instance, it can analyse a mix of bank statements, credit history, cash flow, debt, and other aspects of the financial footprint. Based on the analysis, the software has a credit score that enables lenders to make smart decisions.
3. Customise Products
Lenders must be in a position to innovate and come up with relevant products for businesses. This is where a loan management solution can recommend customised invoice financing products based on the business size, invoice, existing cash flows, and real needs.
Thus, the products can be competitive. Lenders will also be in a position to serve a wide range of businesses and keep growing this vertical.
Invoice financing can help fuel growth for promising, scalable businesses, which need access to credit to fulfil sizable orders. By closing this gap, lenders can nurture a new pipeline of revenues and turn potential borrowers into long-term customers.
By leveraging the right technology to assess the risk profile of businesses and forecast future behaviours, lenders can make data-driven decisions and bet on the right businesses.
Finezza offers a comprehensive set of tools and solutions to manage your lending portfolio. Our end-to-end lending management solutions are trusted by brands like ftcash, Hiranandani Financial Services, gromor Finance, and UC Inclusive Credit, to name a few.
Finezza’s intuitive bank statement analysis software is geared to analyse bank statements with speed and accuracy and detect potential fraud.
Book a demo to know more.