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Invoice Financing vs Term Loans

By Annapoorna

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Updated on: Oct 12th, 2022

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3 min read

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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.

Meaning of term loans

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.

Meaning of invoice financing 

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. 

Difference between invoice financing and term loan

ParticularsInvoice financingTerm loans
Purpose of fund requirementIt 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.
RepaymentIt needs to be completely paid off on invoice maturity.It needs to be paid in fixed installments over a given period of time.
Recommended optionIt 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.
CollateralOutstanding sale invoices are kept as collateral.Assets such as land/building need to be kept as collateral.
Processing timeIt can be processed quickly in a couple of days on the basis of submitted invoices.It involves a lengthy processing time.
Loan tenureThe 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 SheetThere 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.
About the Author

I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more

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