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Tata Capital > Blog > Circulating Capital Loan > Is invoice discounting beneficial for small businesses?

Circulating Capital Loan

Is invoice discounting beneficial for small businesses?

Is invoice discounting beneficial for small businesses?

Small and Medium Enterprises (SMEs) constitute a significant chunk of the Indian business ecosystem. They contribute to 40% of India’s exports and 45% of its manufacturing output. As growing businesses in an unstable pandemic-impacted environment, it is natural that the need for liquidity and timely access to working capital is magnified for SMEs.

One of the easiest ways to access cash in such times is to liquidate receivables and unlock cash trapped within the supply chain. Invoice Discounting is an efficient way for a business to finance its short-term needs at competitive borrowing terms.

Here is how invoice discounting works

The lender accesses details of invoices for goods or services sold to corporate buyers. Based on the corporate’s confirmation, the lender offers to pay sellers early against select invoices in return for a nominal discounting fee. The sellers receive payment in advance, which they can use to buy raw materials, pay wages, suppliers, utility bills, and reinvest in the business. And, the advance is settled when the corporate buyer pays lenders at the end of the mutually agreed credit period.

Additional Read: What you need to Know about Invoice Discounting

Here are some ways invoice discounting can help small businesses, especially in the post-covid economy: 

1. Collateral free infusion of finance

Small businesses can access invoice discounting without needing to provide collateral. The underlying instrument for financing is the unpaid approved invoice, and the lenders base this advance on the buyer’s creditworthiness. 

As a collateral-free solution for cash, invoice discounting can help protect the assets of a business from a debt trap. Moreover, it helps businesses access capital without impacting the balance sheet.

2. Removes loan-repayment burden

The very premise of invoice discounting is the liquidation of unpaid invoices. While loans are beneficial to the SME sector, business owners need additional income streams to service the loans, which may be hard to come by in the post-covid era.

However, with invoice discounting, the loan amounts are settled when the buyer repays the financier. Small businesses are merely taking an advance on what’s already due to them instead of taking a new loan, which eases the repayment burden on stretched cash flows. 

3. Easy disbursal

One of the logistical advantages is linked to invoice discounting is the ease of disbursal.

At Tata Capital, we ensure quick onboarding that is end-to-end digital and hassle-free to support small businesses. Our easy-to-use digital interface and tie-ups with leading corporates in India help ensure fast onboarding and convenient disbursement. Customers can also transact at ease using the platform provided, making the entire process transparent and seamless. 

Additional Read: What is Invoice Discounting? How can it help your business in 2021?

Benefits of Invoice Discounting for small businesses

4. Improved cash flows

Since the discounting charges are nominal, small businesses can access 85-95% of the invoice amount in cash up front. The improved cash flows can be reinvested in the company to ensure day-to-day operations run uninterrupted. It helps strengthen the working capital position, which improves the ability of these businesses to borrow additional funds. 

Additionally, SMEs can take on more business with corporates offering invoice discounting, as they needn’t worry about liquidity issues regarding credit sales. This benefit helps companies increase their turnover by leveraging invoice discounting. 

5. Lower rates of borrowing

Invoice discounting is a unique offering wherein the advances are made to the seller, but the repayment onus lies with the buyer. Given this difference, lenders appraise such loans on the buyer’s creditworthiness, the strength of their balance sheet, and the trade relationship between the buyer and seller. This helps small businesses access financing at much lower rates of interest than their regular borrowings. 

Conclusion

Businesses find themselves in a unique situation as the world heals from the aftermath of the pandemic. While the demand and supply chains stand disrupted, there is also potential to recover, be more resilient, and grow from here. During such recovery, a quick infusion of finance would be a blessing in disguise for impacted businesses. Invoice discounting can help a business survive and propel towards higher growth when used and managed well. 

Get in touch with our experts to receive guidance on whether and how invoice discounting can help optimize your business operations. 

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