Loan Against Receivables: A Practical Guide for Indian Businesses
In today’s competitive business environment, managing cash flow effectively is crucial for sustaining operations and driving growth. One powerful yet underutilized financing option for Indian businesses is Loan Against Receivables. This guide will walk you through everything you need to know about leveraging your receivables to access quick funding.
What is Loan Against Receivables?
Loan Against Receivables is a financing solution where businesses use their outstanding invoices or receivables as collateral to secure short-term loans. It provides immediate liquidity, enabling businesses to bridge the gap between invoice generation and payment realization.
How Does Loan Against Receivables Work in India?
- Identifying Receivables: Businesses identify outstanding invoices owed by clients, typically with a high creditworthiness.
- Submission to the Lender: Submit these invoices to the lender (banks or NBFCs) for validation.
- Assessment by the Lender: The lender evaluates the quality of the receivables, focusing on the debtor’s payment history and credibility.
- Loan Disbursal: Upon approval, the lender provides funding, typically up to 80%-90% of the invoice value.
Key Benefits of Loan Against Receivables
- Boosts Working Capital: Provides liquidity to cover day-to-day expenses without waiting for invoice payments.
- No Asset Pledge Required: Focuses solely on receivables, eliminating the need to pledge fixed assets.
- Quick Turnaround: Faster disbursal compared to traditional loans.
- Flexible Repayment: Payments are linked to invoice settlement, reducing financial strain.
- Improved Cash Flow: Supports operational continuity, especially for SMEs and startups.
Eligibility Criteria for Loan Against Receivables
Eligibility requirements may vary among lenders, but common criteria include:
- Borrower Profile: SMEs, startups, and corporates with verifiable business records.
- Receivables Quality: Invoices should be raised against reputed and financially stable clients.
- Financial Records: Clean and updated financial statements, GST filings, and bank statements.
Loan Against Receivables vs. Other Financing Options
| Parameter | Loan Against Receivables | Invoice Discounting | Working Capital Loan |
|---|---|---|---|
| Collateral | Outstanding invoices | Outstanding invoices | Fixed assets or guarantees |
| Repayment Linked to Invoices | Yes | Yes | No |
| Interest Rates | Moderate | Higher | Varies based on collateral |
| Eligibility | Invoice-based | Invoice-based | Asset-based |
Top Indian Lenders Offering Loan Against Receivables
- HDFC Bank: Offers customized receivables financing for MSMEs.
- ICICI Bank: Provides invoice-backed loans with competitive interest rates.
- SIDBI: Focused on MSMEs under government-backed schemes.
- Bajaj Finserv: Specializes in quick processing for businesses.
- TReDS Platform: RBI-regulated platform connecting buyers, sellers, and financiers for receivables financing.
Documents Required for Loan Against Receivables
- GST returns and tax filings.
- Copies of invoices and corresponding purchase orders.
- Financial statements of the business.
- Bank statements for the last 6 months.
- KYC documents of the business and promoters.
Risks Involved in Loan Against Receivables
- Debtor Default: If the debtor delays payment or defaults, it can create a financial burden for the borrower.
- Interest Costs: Some lenders may charge higher interest rates, impacting profitability.
- Documentation Errors: Incorrect invoicing or incomplete paperwork can delay or reject the loan.
Government Initiatives Supporting Receivables Financing
- TReDS (Trade Receivables Discounting System): A digital platform for MSMEs to sell their receivables to financiers at competitive rates.
- MSME Credit Schemes: SIDBI-backed schemes offer subsidized interest rates.
- GST-Linked Financing: With GST implementation, lenders can now easily verify invoices for loans, simplifying the process.
Tips for Securing a Loan Against Receivables
- Highlight High-Quality Clients: Showcase invoices from reputed clients with a strong payment track record.
- Maintain Accurate Records: Ensure that all invoices are GST-compliant and reconciled.
- Negotiate Terms: Compare lenders to secure competitive interest rates and better LTV ratios.
- Stay Updated with GST Returns: Timely filing of GST returns improves lender confidence.
Case Study: A Success Story
ABC Textiles: A mid-sized garment exporter based in Surat leveraged their outstanding receivables to secure a loan through HDFC Bank. The funding helped them fulfill new orders and maintain steady operations, achieving a 20% increase in quarterly revenue.
FAQs on Loan Against Receivables
- What is the typical interest rate? 9%-16% per annum, depending on the lender and borrower profile.
- Can startups avail of this loan? Yes, startups with credible receivables and stable client relationships are eligible.
- Is TReDS mandatory for MSMEs? No, but using TReDS can significantly streamline the receivables financing process.
- What is the maximum funding available? Up to 80%-90% of the invoice value.
- What happens if the client delays payment? The borrower remains responsible for repaying the loan. Late payments may attract penalties.
Conclusion
Loan Against Receivables is an excellent option for businesses seeking to improve cash flow without selling equity or pledging assets. By understanding the process, benefits, and risks, you can leverage this financing solution to meet your business goals.
Looking for more insights or want to start your own startup?
Are you looking for Startup Funding/Grant/Loan for your Business? Fill the below attached form today!
