Revenue Based Financing is a financing model in which lenders provide funds in exchange for a share of the company’s revenue in the future. The interest payout depends on the performance of a business. Additionally, it includes back-and-forth of some parameters such as the loan amount, the repayment amount over time, the revenue percentage shared with financiers, and payment frequency that is daily, weekly, or monthly. This process helps business owners solve their financial problems, and one such problem could be cash flow.
Business owners sometimes because of payment delays need help with cash flow problems and consider alternative financing options to meet their working capital loan requirements. Among many financing options available is bill discounting or bill invoice. Bill discounting is one of the oldest forms of Revenue-Based Financing. Under invoice discounting, a businessman gets instant access to finance based on an overdue or unpaid invoice in exchange for a small discount. Unpaid invoice realizations can be utilized to pay off the loan. This arrangement gives businesses a break and aids in efficient working capital management.
How Does Bill Discounting Work?
Step 1: The first step in bill discounting involves the selling of products or services to the customer because any bill cannot be created without selling a product or rendering a service.
Step 2: The next step is to issue an invoice that must be paid by the customer within a predetermined period, usually 30 to 120 days.
Step 3: The financing company will give cash to the business against its invoice after deducting a small fee.
Step 4: The last stage is collecting the payment for the invoice. Here, The customer pays the business according to the amount raised for the invoice, and then the business repays the financing company. The business may also assign the finance company the task of obtaining payment from the customer.
Benefits of Discounting Bills from Revenue-Based Financing Companies
- Faster Cash Access: It takes little time for firms to get money because bill discounting reduces risk to lenders. The approval process moves more quickly since the standards are less burdensome than conventional loans. It accelerates cash flow, allowing the company to use the money for a current project, expansion, or past-due debt settlement.
- Accelerates Cash Flow: Many small businesses lack the financial resources to take on more orders with outstanding payments. These businesses may experience cash flow issues when payments are delayed since pressing clients to pay can sour the relationship.Bill discounting solutions can help these organizations improve cash flow through the provision of a working capital loan secured by outstanding invoices.
- Shortens Collection Periods: Sometimes, customers may delay payments, but bill discounting reduces the time it takes to collect invoices. Bill discounting makes money available right away for other business operations by shortening the collecting period. Furthermore, the organization can quickly transform cash held in invoices into liquid cash without waiting for the invoice to mature.
- No Collateral Requirement for Secure Funding: Bill discounting services from revenue-based financing companies make it simple for small businesses to obtain cash because they don’t need any collateral to secure a loan. Instead, the companies will get the money using their unpaid invoices. Due to the lower risk associated with this online business loan option, lenders are more likely to grant funding requests. The service charge and interest the financier deducts when the invoice is settled are the only expenses the firm will have while using invoice discounting in India.
Bill discounting facility or bill invoice discounting in India is available through revenue-based financing platforms such as VedFin. VedFin offers bill discounting solutions to help small businesses with working capital requirements.