The popular Digital lending is a process to offer loans online. You can apply for these loans using your laptops or smartphones over the internet. Every process of the loan lifecycle happens online, and hence, there is no need to visit a bank. The digital lending market is spiking in India.
Digitization of the lending process brings a number of powerful benefits for banks, including better decisions, improved customer experience, and significant cost savings. It is also a complex and challenging project. In this article, #KhabarLive explores how digital lending can improve performance, and talks about what banking leaders should know before they embark on the transformation.
The economic growth and employment of nations depend on small and medium businesses. They are the engine that runs the economy. There is a huge gap due to the SME market being excluded from many formal financial services and new financing opportunities are emerging to fill that gap.
We can see a shift in progressive financial policy across the globe. The mandate and use of electronic invoicing (e-invoicing) have enabled the digital recording and verification of invoices for tax purposes. The current emergence of digital solutions within the financial industry helps bridge the SME finance gap to a great extent.
You can use Invoice Financing to monetise your company’s outstanding invoices. Invoice finance allows businesses in need of a short-term cash injection to get paid immediately, instead of a long wait time to collect payment from customers. The two main types of invoice finance: invoice factoring and invoice discounting.
While the concepts are relatively similar, there are some key differences between them. The well-established and expanding form of SME Invoice financing – Factoring and Invoice Discounting has seen a significant rise in the past year!
Factoring is a process in which you ‘sell’ some of your outstanding invoices. In this scenario, a factoring company will pay you 80 to 100 % of the invoice amount immediately. Once the factoring company receives the full value of the invoice, they will deduct their fee which is comparable to your working capital costs, and return you the remaining amount.
It can be an excellent way for companies with a large number of pending invoices to navigate cash flow problems and improve the stability of their revenue and business.
Factoring offers suppliers a way to eliminate the need to use high-cost financing options like asset-based lending to obtain cash liquidity and stronger balance sheet positions. Factoring also mitigates the uncertainty surrounding the timing of the payments by buyers, which in turn allows for superior cash flow forecasting abilities.
Invoice Discounting is the process in which the discounting company will lend your business a percentage of the money against the accounts receivable. It is like having an overdraft facility that’s secured against your accounts receivables.
Once the invoice is raised for goods or services, the discounting company lends your business an amount commensurate to the full value of invoices, minus the agreed-upon interest. Upon receiving the payment from the customers, you repay the loan and the limit is open for reuse against the next set of receivables.
Here are some differences between Factoring and Invoice Discounting:
| SN | Factoring | Discounting |
| 1 | Factoring is when a business sells its invoices to a third party and then the factoring company controls the sales ledger and collects the debts. | Invoice discounting is an alternative way of drawing money against your invoices. However, the business retains control over the administration of the sales ledger. |
| 2. | A factoring company takes on the responsibility for the collection of invoices | Under an invoice discounting facility the actual business takes on the responsibility for the collection of invoices |
| 3 | The customer is aware of the fact that the invoices have been factored in. | The customer may not be aware of the fact that the invoices have been discounted. |
| 4 | Factoring gives businesses up to 85- 100% payment for a submitted invoice. This enables a business to improve cash flow. | Invoice discounting works by the invoice discounting firm checking the business, its systems, and its customers. The invoice discounting firm then agrees to advance a certain percentage of the total outstanding value of invoices |
| 5 | Under a factoring agreement, a business sells and completely assigns the entire rights to the submitted invoice. | Under an invoice discounting facility you don’t assign or sell the invoice you just raise funds against an invoice or batch of invoices |
| 6 | Under a factoring facility, the customer is aware that there is a third party involved and so the customer may feel uncomfortable | Under an invoice discounting facility and the whole process can be kept confidential by the seller |
| 7 | Under a factoring facility, the customer pays the factoring company directly. | Under an invoice discounting the customer pays the company as normal. |
Factoring and Invoice discounting have become the new ways for companies to maintain the cash flow within the company to mitigate the upcoming risks during the Covid-19 pandemic. It has also opened new avenues in the industry and the future of businesses. The invoicing schemes help companies keep running smoothly and hence the economy in turn. #KhabarLive #hydnews