Most small businesses supply goods and services to large organisations. By doing so, they act as feeders to the input processes of such organisations. Post the delivery of goods and services, they send out invoices to their large customers. However, there is generally a gap of 90 days before the payment is released. Consequently, such small businesses have several invoice receivables with them at any given point in time. This 90-day gap in receiving payments is a prevalent practice in India, becauseof which most small businesses face regular cash flow constraints. However, since their business depends a great deal on these large customers, there is verylittle they can do other than wait for the payments to be made.
Therefore, while keeping yourself restrained pays off in the long run through repeat orders from such clients, there’s also a serious flipside attached to this. These businesses do not get a similar advantage from their suppliers and therefore may have to let go of new business ordersin the absence of funds. This stalls their business growth and makes them vulnerable to exploitation by larger organisations.
The way around
The solution has to be designed around invoices stuck with customers, and it should provide quick finance to small businesses based on such invoices. Multiple loan products have been designed by newage FinTech lenders that offer quick access to finance against invoice receivables from large organisations. One of the fastest ways to get funds is through a practice called bill discounting. Here, you sell pending invoices to third-party lenders for a marginal discount. The discounted invoice amount is credited within a couple of days, as the approval rate is usually very high. However, the downside associated with bill discounting is that you handover the rights to collect the invoice payments to third-party lenders. Some businesses may have objections to such lenders approaching their customers for payments as it maystrain their relations.
Invoice financing or supply chain financing
A better way of generating funds against invoices is through a creditsolutioncalled invoice financing or supply chain financing. Through this product, you can get a specific percentage of the invoice amount upfront, usually for a 30- to 90-day period, and you have the flexibility to return the loan amount either through periodic instalments or as a one-time payment towards the end of the loan period.
However, despite the obvious advantages of supply chain financing, you need to keep certain things in mind. Here we discuss certain measures that can help you make the optimum use ofsupply chain financing:
- Keep a clean and consistent invoice record: Maintain a systematic record of all invoices generated by you. The format used should be consistent across all invoices, and they should clearly mention all key details related to the order, such as serial number, dispatch date, due date, payment options, delivery charges and summary of items delivered. Always send the invoice promptly after the delivery has been made and take regular stock of the pending invoices and total payment due. Such a practice will help speed up your invoice financing
- Maintain a consistent billing schedule: A well-maintained billing schedule would not only enable you to keep a close eye on your cash flow, but will also demonstrate to the invoice financing lender that your business has regular revenue streaming in, and therefore the supply chain financing provided to your organisation will be perfectly safe. This will enable you to secure invoice financing whenever required and without any hassle.
- Maintain digital copies of invoices: In the digital age, it is crucial to have all records in digital format. Whenever you change accounting software or move to new premises, you will have your records in one place. This willsmooth your application process for supply chain financing. Moreover, dispatching digital invoices to lenders is also much easier as compared to paper invoices. Besides, you can quickly apply for invoice financingonline should a need arise rather than wait for physicalinvoices to be scanned.
- Regular invoice tracking: Tracking your invoices regularly not only helps you keep a tab on the payments due, but also lets you update your financial and tax statements regularly. Keeping your financial statement updated is a soundpractice,one that will help you in fast tracking your supply chain financing
- Send timely reminders to customers: It is very important to keep sending reminders to your customers for making payments and maintaining a proper digital record of such reminders. This showcases your business dealings in a goodlight to the invoice financing lender and helps themlook at your business prospects favourably while deciding onthe supply chain financing
- Communicate your business policies clearly: Your invoice should clearly mention any penalties associated with late payment, and the business communication with your customers should mention your business policies in clear terms. This will help strengthen your case in the future should there be any dispute related to the repayment of invoice financing It will also enable you to justify a default in payment to the invoice financing lender should it occur due to at the customer’s end.
- Knowledge about your customer’s business: Adequate knowledge about the history of your client’s payments and theirfuture business projects, as well as the credit cycle followed by theorganisation will help you convince the supply chain financing lender about the discipline in invoice payments practised by your customer.This, in turn, will help you secure the best invoice financing deal from the lender.
Maintaining your business processes in a systematic manner and keeping a record of your invoices and other related financial statements will work to strengthen your case for invoice financing from a FinTech lender, and will also help you with speedy access to funds should an urgent business need arise.