Invoice Financing vs Channel Financing: Which Is Better For Your Small Business?

A business requires an adequate amount of working capital to ensure there is no disruption in the flow of daily operations. Without sufficient funds, an enterprise will fail to cover its expenses, which include the purchase of raw materials, payment of rent and salary. Efficient working capital management boosts the revenue generation of an organization and maximizes profits in the long run.

Businesses that are struggling to meet the working capital requirement can avail of short- term financial assistance in the form of invoice financing (receivables financing) or supply chain financing. Nevertheless, these two terms often create confusion among business owners. Hence, one must be aware of their differences.

Differences between receivables financing and supply chain financing

The following are the differences between receivables financing and supply chain financing (channel financing):

• Control over sales ledger

In the case of supply chain financing, the financier has control over the enterprise’s sales ledger. Nevertheless, if a business opts for supply chain financing, the financier may or may not gain control over the enterprise’s sales ledger.

• Payment collection

If a business opts for supply chain financing, the lender directly collects the payment from the enterprise’s customers. But, on the flip side, the business will be responsible for collecting payments from its customers if it chooses invoice discounting.

• Confidentiality

Lenders providing supply chain discounting services may directly approach an enterprise’s customer to collect payments. However, if an entrepreneur avails invoice financing services, the organisation’s customer does not have to deal with the financier. Hence, the customer is not aware of the lender’s involvement.

Although these financing options can be helpful to meet working capital requirements, they are not an ideal option for long-term financial needs. This is because the amount of funds that can be raised is limited to the invoice amount. Hence, entrepreneurs can opt for better alternatives, such as a business loan.

Besides meeting working capital needs, entrepreneurs can expand their operations and diversify their product line by availing of an enterprise loan. Nevertheless, make sure to take note of a few tips to grow your business and maximize your profits.

Business loan – a better alternative

Here are the reasons why availing of a business loan is a better option than accounts receivable financing or supply chain financing:

• Collateral-free

Business owners do not have to pledge any property to gain access to funds. Therefore, a business does not have to place its equipment, machinery or any other asset as collateral.

• Substantial loan amount

Contrary to channel financing and receivables financing, entrepreneurs can raise a substantial amount of funds by opting for a business loan. Individuals can get up to Rs.45 lakh by availing a business loan from a financial institution. Hence, this form of financial assistance enables all entrepreneurs to fulfill both short-term and long-term financial requirements.

• Overdraft facility

Financial institutions such as Bajaj Finserv offer a unique overdraft facility, known as Flexi Loan. This loan overdraft facility can help businesses to meet the working capital requirement and maintain a smooth flow of daily operations. One can withdraw cash into his/her account from a pre-approved limit and fulfil short term financial requirements. Moreover, this allows borrowers to pay only the interest as EMIs for the initial part of the tenor.

Moreover, this NBFC also provides lucrative pre-approved offers for its existing customers. These offers are available on both secured and unsecured financial products, such as business loans and credit cards. Check your pre-approved offer now by entering basic information, such as name and contact details.

• Flexible tenors

Business loans offered by financial institutions have flexible tenors; entrepreneurs can select a tenor of up to 84 months. Hence, individuals must opt for a repayment period in line with their financial capacity.

Owing to the benefits mentioned above, business loans get more preference over other credit options, such as invoice financing or supply chain financing. Nevertheless, to avail an enterprise loan, one needs to meet the eligibility criteria and submit certain documents. Moreover, these requirements may vary based upon the financial institution. Hence, it’s imperative that individuals know the eligibility criteria and the documents required for business loan beforehand.