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SME’s Guide to Invoice Factoring & Other Financing Alternatives

 

The struggle with cash inflow and outflow is a very common and regular problem faced by companies of every size whether small, big or a start-up. At present, most of the companies are seen processing invoices to manage their transactions and such companies suffer the most while managing their working capitals. Fortunately, their problem got solved with the introduction of Invoice Factoring.

Invoice Factoring is the process in which a company which provides goods or services raises an invoice to the businesses or government agencies. Invoice factoring provides short-term working capital in exchange for selling invoices to the factor. The factor releases the funds for up to a certain limit of the invoice value i.e. about 80% - 85% as soon as the invoices are submitted to the factor. Then, once the invoice is paid by the customer, the factor pays the remaining 20% - 25% (minus fees). The fees that the factors charge are way too less than that is charged by other lending institutions because it depends on volume and amount of invoices

Types of Invoice Factoring

There are different types of factoring that are currently being offered in the market. These types are:

  • Recourse Factoring The majority of companies deal with the recourse factoring. In this process, if the customers don’t pay the invoices then, the business owner is liable to pay the unpaid invoices.
  • Non-recourse Factoring Under the Non-recourse factoring deal, the liability of the unpaid invoices by the customers is bared by the factor. This type of deal generally comes with higher fees.
  • Undisclosed or Confidential Factoring Undisclosed or Confidential Factoring is also known as Invoice Discounting. In this, the unpaid invoices are neither purchased by the factoring company nor are paid by the owners. The unpaid invoices are rather used as Collateral. In Confidential Factoring, the customers never get to know about the involvement of the third party in the whole arrangement.

Role of Digital Lenders for the Small and Marginal Enterprises (SME’s)

The 2018 Union budget has described the significant role of SME’s in the development of the country in terms of employment and exports. As SME’s hold a great share in the overall development of the country, it became a priority for the players of this sector to look for smart and quick solutions to manage their working capital, cash credits, overdraft, and transactions.

Off late, Small and Medium Enterprises (SME) ditch the traditional lending options and are now focusing on the digital lending. Digital lending has emerged to be quite beneficial for them in managing their finances.

Driven by technology and data, the new age FinTech Companies have provided SME’s with quicker financial solutions, lower fee and higher transparency as compared to the traditional lending institutions. These money lender companies have eliminated the 3-4 months wait to get a credit loan. In India, FinTech companies have experienced a good growth in the last years. And, according to the reports by KPMG and NASSCOM, it is expected to cross $2.4 million by 2020. To a surprise, most FinTech lenders specialize in micro-financing and SME lendings. These technology-driven companies, backed with Artificial Intelligence (AI) and Big Data come with leading-edge assessment processes to meet the credit requirements of SME’s.

Benefits of opting for FinTech Lenders

Opting for these technology-driven platforms undoubtedly has enormous benefits for the SME’s. Some of them are:

  • Easy Application Processing: Unlike the traditional banks, where applying for a loan requires a lot of paperwork to be completed, FinTechs come with a super easy and digital alternative to do the same. Their bots and algorithms automatically collect all the relevant information from sources available online and access the credibility of the concerned SME.
  • Quick Assessment: Unlike the traditional method of scanning documents, data-driven FinTechs evaluate the creditworthiness of an SME using Big Data, social media history, credit scorecard, the trading position and several other raw data points. The best part is, all of it is done within a few minutes.
  • Swift Loan Disbursement: FinTechs usually take 2-3 days to disburse a loan to an SME after making all the analysis. Getting working capital within a few days instead of 3-4 months helps SME’s to carry on their functions smoothly without facing any capital crunch.
  • Lower Rates of Interest: Digital lending companies come with specialized algorithms and make use of AI to carry out their process. This leads to minimal human intervention during the process as well as complete transparency and almost no use of paper. With a very less cost of underwriting, the rate of interest is also set at a lower price as compared to the traditional and informal moneylenders.

Factoring may seem a little bit complex and a daunting task to many new SME’s but this is a great way to smoothly carry the financial transactions. Digital lending is covering up the whole market every day and has brought positive impact on the Indian market. There is no going back for these FinTechs and with the advancement of technology, all the existing limitations with which the SME’s have struggled will get washed away. These technology-driven FinTechs with enabled efficient financial assistance will definitely bring long-term growth for the SME’s and for India.

  • April 12, 2018
Rajesh Kumar Lakshmanan
Rajesh is Product Manager with Lendfoundry and he is responsible for Product Roadmap, strategy and implementation. He has over 8 years of Financial industry experience, working majorly on cards & payments, Retail and Wholesale Banking. Rajesh holds PGDM from IIM-Indore and Bachelors in Engineering from Anna University. He can be reached at Rajeshkumar.L@Sigmainfo.net

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