How Invoice Factoring Fits Perfectly Into The Working Capital Requirement Of Indian SMEs

Small and medium enterprises (SMEs) form the backbone of the Indian economy. It is estimated that they contribute about 45% of the nation’s total manufacturing output and 30% of its exports.

But India’s SME exporters often cannot perform at their full potential as many of them face working capital shortages. There could a long time lag between shipping goods to overseas markets and receiving the payments that are due.

Traditional sources of finance like banks may not always be able to help. Their approval procedures can be complex and time-consuming and they usually require borrowers to put up some collateral. SME exporters require quick credit decisions so that they are able to take advantage of market opportunities. Providing suitable collateral can also be a problem.

This lack of working capital finance can lead to a loss of export orders. Fortunately, there is a simple solution. SME exporters can use invoice factoring to meet their working capital requirements.

How invoice factoring works

An exporter can obtain finance in a matter of days for the goods that have been shipped to an overseas customer. The procedure works like this:

• A purchase order is placed by an international client on an Indian exporter.
• The exporter submits certain information, including details about the importer to the factoring company. If the proposal is approved, a factoring agreement is entered into between the exporter and the factoring company.
• The export shipment is made and the invoice is submitted to the factoring company. The factoring company makes payment of up to 80% of the invoice value to the exporter.
• The factoring company collects payment directly from the importer as per the agreed credit terms. The remaining 20% is paid to the exporter after deducting the applicable charges.

The process is as simple as that. You do not need to provide any collateral and there is no need to go through a complicated and lengthy approval procedure.

Benefits of factoring

Indian exporters can gain a tremendous advantage by using invoice factoring to overcome working capital shortages. It is a quick, convenient, and low-cost method of raising finance. Additionally, the exporter need not worry about the problems associated with collecting payments from overseas parties.

The factoring company will take care of collections. In fact, if the importer defaults on payment, the exporter will not be liable. Under most circumstances, the factoring company is responsible for the credit risk associated with the transaction.

Quick finance without the hassles

An increasing number of Indian SMEs is using invoice factoring to boost their export volumes. It allows SME exporters to raise working capital finance quickly and easily and in one of the most cost-effective ways. An added advantage is that you don’t need to worry about the administrative and credit issues involved in receiving payment from your customer. This is taken care of by the factoring company.

About Drip Capital

Drip Capital is a trade finance company headquartered in California, USA. We offer finance to Indian exporters selling to buyers in North America, Europe, Middle East and Asia Pacific. Established in 2014, Drip Capital has built a strong presence across India having financed hundreds of shipments across industries such as textiles and garments, packaged and frozen foods, metals and engineering goods. With focus on SMEs, we have provided our clients timely access to working capital and helped them grow their exports by as much as 60% in less than a year.