3 Reasons about Invoice Finance That Business Can't Wait for Cash

Steady flow of cash is one of the pillars of smooth business operations in any enterprise—more so in a small or medium one. Managing cash flow efficiently is key to business growth too, especially when you need to scale up or cash in on a business opportunity on short notice. However securing funds is not quick or easy through traditional channels such as banks and other financial institutions. So what is a small business operator supposed to do to meet their working capital requirements? The answer may lie in the form of invoice financing, a unique process that makes raising funds more efficient.

What is invoice financing?
Are you a harried employer waiting for collections to happen so employees can be paid their overdue salaries and work can continue? This is a familiar scenario in small businesses where cash flows in and out irregularly. The best way for an enterprise to address its working capital needs is through invoice financing. Invoice financing allows you to advance payments on outstanding invoices, which could date back from 90-120 days before the payment arrives. The advancement enables you to ensure that the flow of cash is not blocked and your employees are kept on the payroll. The importance of invoice financing lies in the fact that the invoice itself acts as the collateral. In a country like ours, where getting a bank loan depends on the size of the collateral you offer, invoice financing is a welcome development.

How does invoice financing work?
There are two ways to finance invoices. The first is through a sale. Invoices can be sold to a company in exchange for an immediate payment. The second way involves usage of receivables to secure credit through a loan based on assets. Both these solutions generate similar results and only differ in methodology. Invoice factoring allows companies to sell their accounts receivables to improve their working capital. This replenishes the business with quick funds that can be used to pay for company expenses. In invoice discounting, a company makes its own collections and then forwards the amount to the banker. The business receives between 80-90% of the invoice amount upfront.

Small and medium sized enterprises (SMEs), said to be the backbone of our economy and a major force in job creation, still experience difficulty in securing sufficient and timely finance. These enterprises keep running out of cash routinely. The main reason for this is delayed payments from customers. Late payments could easily lead to financial difficulties. SMEs typically tackle the problem by borrowing money either from informal moneylenders or getting loans from banks. Banks have time-consuming procedures and complex requirements; and moneylenders could trap SMEs in a cycle of endless debt.
However, invoice finance solutions can open up a host of funding options for these small enterprises. Small business owners can make use of invoice financing without having to worry about collateral and tedious paperwork.
Invoice financing offers multiple benefits to the SME sector. Here are four compelling reasons why small business should opt for it:

1. Avail instant funds: Invoice finance companies assist SMEs with access to funds instantly rather than depending on bill payment by the customers. One of the main impediments to the growth of SMEs is lack of timely funds. This affects expansion as they cannot even meet basic expenses at times. The quick availability of funds however takes away the pressure to restrict expenses. This lets small enterprises focus more on business growth. Invoice financing companies can help businesses, especially in the manufacturing sector, be more productive as they can take on a larger number of orders.
2. Optimize non-liquid assets: Discounting frees a large portion of unused assets like trade receivables (which are not considered liquid assets) for use in business. These assets usually remain unrealized and can't easily be changed to cash. Financing the invoices turns it into readily usable assets in the form of funds that can be used for the business.
3. Go digital: Invoice financing gives you the option to encash pending invoices. All you need is an account so that you can pick the invoices you want cleared. All these processes need to be done online – which automatically introduces small players to digitalization of business transactions and the benefits it offers. Once you have uploaded the essential documents, you can avail of invoice financing facilities in a matter of hours. Digitalization also opens the door to the vast global market for small companies. It opens up options of new ways of doing business, and leveraging e-commerce platforms to reach newer markets and geographies, spurring aspirations and hence, growth.

Conclusion:
As we have seen, invoice financing enables a predictable and stable cash flow to keep you in the running. Small businesses have all the more reason to opt for it because it's a far better option than traditional bank loans. Customers routinely delay payment of invoices from smaller companies, hampering their growth and prosperity. Invoice financing strikes a fine balance between receivables and expenses keeping SMEs on the path to sustainable growth.

Read: How To Fill the Gap in Short Term Finance Applications