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.
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.
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