Clear Finance
Finance is required for any business to meet its cash requirements. Banks and financial institutions provide various financing solutions. Finding the right option per business needs and requirements is essential to ensure no shortfall of cash.
A term loan is a specified amount that needs to be repaid in regular instalments over a set period. Banks/financial institutions usually grant such types of loans. Term loans are issued with a fixed or floating rate of interest. The lender will set a repayment schedule according to the borrower’s financial situation. It will verify the applicant’s creditworthiness and other financial reports to decide on the loan amount and interest rate.
Businesses usually take term loans to buy fixed assets or for expansion purposes. It is usually a long-term loan to be repaid in instalments.
Invoice financing is short-term finance. Under invoice, financing can raise funds by keeping its outstanding sale invoices as collateral. No asset needs to be kept as collateral. Therefore, it is also called ‘receivable financing’. It facilitates self-generating cash flows to meet its day-to-day expenses such as salary, wages and other operating expenses.
It needs to be paid off on the invoice due date. Unlike term loans, there are no repayment schedules or fixed instalments.
Particulars | Invoice financing | Term loans |
---|---|---|
Purpose of fund requirement | It is taken to bridge the cash flow gap between having to pay business expenses and getting paid by customers. It is a short term funding solution to meet timelines. | It is taken for big improvements such as buying a new fixed asset or technology upgrades. It can be long term as well as short term funding. |
Repayment | It needs to be completely paid off on invoice maturity. | It needs to be paid in fixed installments over a given period of time. |
Recommended option | It is recommended for businesses which require quick cash flow. | It is recommended for businesses which have major expansion plans or require plant & machinery/equipment to boost its production. |
Collateral | Outstanding sale invoices are kept as collateral. | Assets such as land/building need to be kept as collateral. |
Processing time | It can be processed quickly in a couple of days on the basis of submitted invoices. | It involves a lengthy processing time. |
Loan tenure | The loan tenure is short. It usually ranges from 30-90 days. | The loan tenure is longer. It may range from 1/5 to 10/20 years. |
Impact on Balance Sheet | There is no impact on the balance sheet as it is provided on the basis of unpaid invoices. | It is reported in the balance sheet as borrowings. |