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Published : September 28, 2023, Updated : October 17, 2023

Avoiding Cash Flow Crunch: How Invoice Discounting Can Help SMEs

Avoiding Cash Flow Crunch: How Invoice Discounting Can Help SMEs

Lately, numerous effective government initiatives have turned into a surge of startups budding in the country like a wave. Not only are these startups coming forward to tackle unemployment issues, but they are also playing a commendable role in boosting the country’s economy. However, at the core lies the financial crunch for small enterprises, which sometimes bottlenecks their growth and limits their expansion.

Figuring out the financial crunch becomes a primary objective for SMEs to keep sailing in the business ocean. One such financial crunch escape is Invoice Discounting, also known as Invoice Financing.

SMEs rely heavily on receiving payments against their invoices from clients to run their business operations smoothly. However, receiving the payment is not enough, and when the payment gets settled is more important. Typically, 30-45 days is the standard time for the invoice to be paid, but sometimes it might take 90–120 days, leading to a cash flow crunch in the business. In that case, businesses can quickly opt for invoice discounting.

Want to know more? Keep reading!

What is Invoice Discounting Or Invoice Financing Or Bill Discounting?

Invoice discounting is a short-term financial agreement between a financial company and the recipient by using the latter’s outstanding invoices as collateral.

The process involves selling unpaid invoices to the financial institution in return for receiving an immediate cash payment.

The payment is typically a percentage of the invoice’s total value at a discounted rate. Invoice discounting helps SMEs meet their short-working capital needs without much hassle.

Also Read: The Ultimate Guide on What is Invoice Discounting

Quick Glance On The Features Of Invoice Discounting

Here’s a quick bite to grasp about the features of invoice discounting.

No collateral is required. The unsettled invoices are enough to avail of Invoice Discounting.
Get around 90% of the invoice amount.
Lower rate of interests.
Minimum paperwork required.
Quickly get the amount.

How Does Invoice Discounting Work?

Here’s a step-by-step guide for you to understand the process of Invoice Discounting better.

1. After selling goods and services to the client, the seller generates an invoice that has the purchase details, including the payment details.
2. The invoice is a credit transaction that gives leverage to the client to settle the amount until the last date, binding the money earned by the seller.
3. Invoice Discounting is a way to release the fund, which the seller can seek from a financial institution.
4. The lender reviews the invoice and agrees to pay a percentage of its value, typically between 75%-90%.
5. When the customer settles the invoice, the lender deducts the discounting fees (the difference between the invoice amount and the advanced payment) from the total.
6. The seller gets the cash and can continue with the operations smoothly.

How Invoice Discounting Can Help SMEs?

Let’s get into how invoice discounting can help SMEs to sail through the rough waves.

1. Improves Cash Flow

The availability of loans to keep the cash flowing smoothly has always been a tough part for SMEs. With invoice discounting, these businesses don’t have to go through a lengthy loan process with the baggage of interest or collateral. Short-term funding with Invoice Discounting becomes smoother with enough cash to carry on with the operations without interruptions and more confidence. It also allows SMEs to grab all the opportunities coming their way.

2. Simple Repayment Options

Invoice discounting, a part of supply chain finance, ensures a transparent lending process. The lender provides flexible repayment schedules of around 15 days to 6 months. This allows borrowers to repay a significant part of the bill with convenience. Repayment cycles are designed for the borrower’s ease and efficiency.

3. No bad Debts

Bad debts can be a great risk for small businesses. Bad debts here mean clients are not repaying the amount they own for the goods and services provided to them. Invoice discounting, to some extent, helps businesses deal with bad debt by allowing them to conduct a proper credit check on the debtor. It can be a life saver for SMEs.

4. No Need For Collateral

Unlike traditional loan methods, SMEs don’t have to present any collateral against funds advanced through Invoice Discounting. It can be called a collateral-free cash arrangement. Therefore, for entities with low turnover, this cash arrangement turns out to be very attractive, especially for SMEs.

5. Long-Term Relationship With Customers

With Invoice Discounting, you have flexible payment options to offer your customers. It strengthens your relationship with clients. Offering Invoice discounting and accommodating repayment schedules not only wins their hearts but also fosters customer loyalty. It further attracts new customers, which helps you outshine your competition.

6. Good Customizing Features

One of the benefits of Invoice Discounting is customization. Meaning? The seller can decide the amount of cash they want. So, sometimes they can partially finance their invoices, and sometimes they can apply for the full amount. Not only this, but they also get the flexibility to control the repayment process. Example: If they want to repay the amount in a shorter time, say, 30 days, they are free to do that. Or if they want to keep the period longer, they can.

7. Better Investment Opportunities

In the fast-paced and dynamic business world, it’s important for SMEs to keep upgrading their infrastructure, be it IT systems or anything else, to be more competitive and survive the tough market with humongous competition. But this overhaul requires a considerable amount of cash, which could be a task for small businesses. Here, invoice discounting can directly or indirectly be a source of growth by readily making funds available.

8. Fulfill Seasonal Demands

Small businesses, especially in the beginning stages, don’t make enough profits to tackle financial needs with ease. Some months could be months of higher sales, while others would have no prominent sales. It could be seasonal, but the invoice’s collection tenure is the same. Therefore, even during the peak season, businesses suffer a cash crunch, which hampers their order fulfillment capacity. But with Invoice Discounting, SMEs can overcome this seasonal crunch.

9. Retaining Skilled Workforce

Timely employee payment is vital to retain skilled workforce. SMEs often struggle with this responsibility that leads to employees leaving the organization. Invoice discounting offers a solution by providing funds to pay employees on time, along with bonuses, fostering loyalty and aiding skilled recruitment, ultimately contributing to business growth.

Why Should SMEs Choose a Reliable Financing Partner Like Credlix?

There are multiple reasons why small businesses should opt for a reliable financing partner from whom they can avail themselves of financial tools like Invoice Discounting.

1. Trust & Reliability

Credlix is a trustworthy Global Supply Chain Finance in India with a reputation of many happy customers at the peak of its capability. SMEs can confidently rely on Credlix to handle their invoice discounting needs with professionalism and integrity.

2. Seamless Process

Credlix makes it hassle-free for the users by providing an online platform for Invoice Discounting for SMEs. These enterprises can easily submit their unsettled invoices and get quick funds for maximum convenience.

3. Competitive Rates

Invoice Discounting from Credlix has an added advantage of competitive rates. It further ensures that customers get a favorable deal.

4. Customer Support

Client satisfaction as the ultimate priority, Credlix offers top-notch customer support throughout the entire Invoice Discounting process. From taking queries to addressing concerns, Credlix’s customer support team is readily available to help.

Also Read: Invoice Discounting vs Bank Loans: Pros and Cons for Businesses

To Conclude

Invoice Discounting is a crucial financial tool for SMEs facing cash flow issues. With no collateral required and a streamlined process, it provides easy access to capital, improving working capital and supporting business in the growth activities. By reducing the risk of bad debt and improving customer relationships because of flexible payment options, SMEs can thrive in a competitive market.

Moreover, the customization features and investment opportunities further strengthen their financial position. Invoice Discounting’s role in helping SMEs meet seasonal demands and retain a skilled workforce underscores its significance in sustaining and propelling the wave of startups contributing to the country’s economic growth.

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