A Guide to MSME Finance and Accounts Receivable Financing

Managing cash flow and credit sales can feel like a never-ending tug-of-war for businesses of all sizes. But for small enterprises, it’s a callous balancing act that can make or break their success. They can keep the lights on and the doors open with careful control of their cash inflows and outflows. That’s where invoice financing, or accounts receivables financing, comes in – an intelligent solution for short-term borrowing that can help businesses stay afloat. So, buckle up and get ready to boost your cash flow! In this article, we’ll give you the top seven advantages of invoice finance offers small businesses.

Invoice Financing Explained: The Key to Smooth Business Operations

Accounts receivable financing or invoice financing allows businesses to use the money they expect to receive. In order to satisfy their immediate cash flow requirements, businesses can utilize this service to borrow money against their outstanding. After removing the margin and other fees, the lender will pay the invoice immediately. The borrower is responsible for paying back the advance amount, plus interest and fees (if applicable) when payment is received on these invoices.

Finances based on accounts receivable and invoices release funds expected in the future. Businesses can use this service to borrow money against their outstanding, creditworthy invoices for their immediate cash flow requirements. If applicable, the borrower pays back the advance amount plus interest and fees when payment is received on these invoices. After subtracting the margin and any other fees, the lender will spend the whole amount due on the invoice. There are several reasons why small businesses should consider invoice finance. Let us see them in detail below.

Say Goodbye to Cash Shortages: A Guide to MSME Financing

A fast and “no fuss, no frills” option for MSME financing receivables is available through invoice financing. The credit facility can be processed quickly because there is no need to secure it with collateral. From the moment an application is submitted to the point of disbursement of funds, the complete process typically takes no more than 72 hours.

In addition, the entire credit is paid back in lump sums when the payments are made. This eliminates the need to stress about making loan payments on time. Loans for established businesses need collateral depending on the value of the company’s assets. Furthermore, financial statements from previous years are typically required by lenders for credit evaluation. For startups and small enterprises, these stringent standards mean they will likely have to borrow from lenders to get the money they need.

In contrast, firms can get advances against their outstanding bills through Invoice Financing. This is especially helpful for new businesses that need more financial records to apply for loans (such as a balance sheet for the last three years or a GST return for the preceding two years). Invoice financing provides businesses with greater flexibility and management over their finances than other borrowing forms.

Businesses can obtain financing for either general customer accounts or individual bills as often and as much as they need. Firms can also determine how much management authority they want over their accounts payable collection procedure by selecting a particular form of invoice finance.

A Comprehensive MSME Finance Guide to Invoice Financing for Business Growth

Companies use invoice factoring to offload the burden of debt collection onto third-party lenders. Lenders typically advance 80% to 85% of an invoice’s total to the borrower. Lenders receive the receivables, relieving invoice holders of the obligation to pursue payment. As soon as the lending company receives the total invoice value, any remaining funds will be sent to the borrower, less applicable interest and fees.

When a company gets payment on an invoice on the due date, it settles the debt owed to the lender, including any fees and interest. With factoring, the lender is involved directly in the collection process, reducing the risk of debts and late payments. They can also verify the buyer or client’s credit to determine their reliability. Invoice discounting allows businesses to keep full management over their accounts receivable while benefiting from the savings. Companies can get loans for up to 90 percent of the value of an invoice through invoice discounting.

Go for Timely Payments

The cash flow gap between AR and AP can be minimised by invoice financing. Those funds are available when a buyer is given a credit period between thirty and ninety days. Short-term debts, such as employee wages and vendor bills, are settled with these funds. It’s put back into the company for more growth and development.

Lean margins are common for small enterprises. Because of this, they are unable to offer their clients extended payment terms. When current debts are paid on time, businesses have financial breathing room to reward their most reliable clients with longer credit terms. Also, a company’s creditworthiness improves when its debts are paid on time.

Devote Resources to Your Core Functions

Businesses may devote more time and energy to what they do best, thanks to the rapid conversion of invoices into cash made possible by invoice financing. Instead of spending time and money pursuing debtors, companies can put those resources to better use in areas such as expanding their customer base and implementing new processes and procedures.

Also Read: Cash Flow Management for Indian MSMEs: Best Practices

Ditch Overdrafts & Loans for Increased Profits

When dealing with a tight financial situation, every penny counts. To get beyond the cash shortage, businesses will hunt for the highest borrowing cap they can find. Financing institutions typically hold twenty percent to twenty-five percent of the assessed value as a reserve for overdrafts and loans. Financing invoices provide a better return for businesses because lenders can advance 80-90% of the invoice value.

Overdrafts and loans both incur quarterly service fees. Invoice financing requires a single payment of a service fee or fee (as a portion of the loaned amount). Business loans with interest in the double digits will cut into long-term profits. Invoice financing can save a company money when compared to traditional bank loans.

Power Up the Business Without Draining Finances

In the end, a financial statement is like a report card for a company. This may sound like the language of a certified accountant, yet it perfectly captures the essence of the points we have made. It’s never beneficial for a business to take on too many brief debts to cover excessive amounts of receivables due within a short period. Unlocked cash can be obtained through invoice financing without significantly impacting the asset-liability ratio.


By going through our MSME finance guide, you would have understood how invoice financing can provide a quick and flexible solution to address business cash flow issues. Invoice financing is a powerful tool businesses can use to maintain financial stability, reward reliable customers with extended credit terms, and ultimately drive growth and success. With invoice financing, companies can receive funds based on their accounts receivable and invoices, allowing them to grow and manage their finances better. It can also help them avoid the burden of debt collection and the need for collateral, allowing them to focus on their core functions and devote their resources to more productive areas.

MSMEBlog discusses issues with finding suitable funding sources for MSMEs and guides them with the procedures to acquire the necessary financing. Visit MSME Blog website for more information on MSME finance.

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