The Biggest Myths of Invoice Financing

Invoicing financing is a well-known process in the business community and considered as one of the best options for meeting urgent fund requirements. However, many entrepreneurs are misguided by various myths that surround it.

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What are these myths? Let’s discuss each one by one, but before that, a brief on invoice financing aka invoice discounting:
The Basics of Invoice Financing
In invoice financing, a business owner can get a loan from a bank on the basis of the invoices that are to be cleared by their customers/clients in the near future. Once they receive the money from their customers, they can repay the loan to the bank.
Usually, the maximum amount a borrower can qualify for is roughly 70% to 80% of the total invoice amount. So, if the combined amount of the invoices is Rs. 5 lakh, then the borrower can get anywhere between Rs. 3.5 lakhs to Rs. 4 lakhs.
Different banks and financial intuitions charge differently for the invoice financing service. Some impose a flat fee, others may charge a certain interest rate.
The following are some of the biggest myths about invoice financing:

1. It is not Cost-Effective
   Many business owners think that invoice financing is expensive. However, that’s not true. While invoice discounting isn’t the best option for funds raising, it’s still easily affordable especially when compared to other common options. The reason behind it is that in this, the risk is low on the lender’s part as they get to keep the invoices as security.
2. It’s Meant for Only the Failing Businesses
   Invoice financing is a viable option for businesses that are in dire need of funding, as well as those who are already well-established. In fact, many successful business use this option to meet urgent short-term funding requirements such as inventory purchase, paying salaries to employees, etc.
3. The Contracts are Long-Term
   A lot of banks offer invoice financing only for long-term contracts that cover 6 months to a year. This is because they want the deal to be fair from their perspective too. However, there are some NBFCs that are more flexible and can settle for shorter terms such as 2-3 months.