MSMEs (Micro, Small and Medium Enterprises) are the backbone of the Indian economy and face numerous challenges, including delayed payments from customers. While business loans are opted for by those who need large sums of money, invoice discounting is the better option for borrowers who need short-term and quick access to funds, mainly to carry out daily operations and manage cash flow.
In this article, we’ll explore why MSMEs should choose invoice discounting instead of traditional loans and discuss the key factors to consider when applying for the same.
What is an Invoice Discounting?
Invoice discounting is a financing option that allows businesses to borrow a sum for a short period of time in exchange for their invoices. The lenders assess the creditworthiness of the businesses and provide a percentage of the invoice’s funds to the borrowers. Whenever the customer makes a payment, the lender deducts the amount borrowed along with the extra charges and transfers the balance back to the borrower’s account.
Traditional loans have stricter eligibility criteria than invoice discounting loans. They mainly involve lengthy processes and paperwork management. Many lenders even ask borrowers to pledge collateral as security and charge interest rates and additional fees. If you are looking to borrow a significant sum of money, then apply for a business loan online for more flexibility in terms and conditions.
Why Choose Invoice Discounting?
Let’s explore the reasons why an MSME should choose invoice discounting as a financing option:
- Instant Access to Funds: With invoice discounting, borrowers can seamlessly access quick funds to carry out daily operations and invest in growth without waiting for customers to make payments.
- No Collateral Required: Unlike traditional business loans, borrowers do not have to worry about pledging an asset as collateral, which is beneficial for small businesses without assets or limited assets to access funding.
- Flexibility of Payments: Invoice discounting offers greater flexibility than traditional loans. Businesses can conveniently choose the invoices they want to discount based on their needs. The more invoices a company receives, the more funds it can access, making it a flexible financing option.
- Maintains Creditworthiness: By maintaining a consistent cash flow and time record of invoice payments, businesses avoid damaging their creditworthiness, enhance borrowing capacity in the future and open doors to other loan options like business loans online.
- Scalability: Invoice discounting allows businesses to scale their operations and sales volume and meet growing needs without worrying about the funds.
How to Start with Invoice Discounting?
To start the invoice discounting process, follow these steps:
- Research for a suitable invoice discounting provider and understand their terms and conditions to make sure it align with your business needs.
- Plan the invoices you want to discount and ensure your customers have good creditworthiness.
- Start with the application process and submit the necessary documents.
- Provide the invoices for the discounting process and wait for lenders to review them.
- Once everything is done, you’ll receive the funds.
Key Considerations
Before opting for invoice discounting instead of business loans, consider the following points:
- Make sure to check the eligibility criteria of the lender and if you qualify for the same.
- Compare your options and choose a lender that suits your needs.
- Ensure that the customer invoices you provide are of good creditworthiness, and check whether your business has a uniform credit history.
Final Thoughts
It is concluded that invoice discounting is a good financing option. If you want quick access to short-term funds and have a number of invoices, then you can choose to go with invoice discounting. Otherwise, you can search for a reputed business loan mobile app like Bajaj Finserv. The app offers flexible repayment options, is 100% digital and offers a quick approval process.
It is essential to assess your business needs and preferences before making a choice. If you are an MSME owner, then invoice discounting can considered as a good option.
