Is invoice financing a debt?

Technically, it is a form of asset-based financing. In factoring, it is viewed as the "sale" of an asset (the receivable) rather than a traditional business loan liability.

What is the average cost of invoice financing?

Costs typically include a service fee (1% to 5% of invoice value) and a discounting rate (interest) on the advanced amount calculated on the number of days until settlement.

Can startups apply for invoice financing?

Yes. Since the focus is on the creditworthiness of your customers, even early-stage startups with strong B2B contracts and a valid GST history can qualify.

What happens if a customer doesn't pay?

In a "Recourse" agreement, your business is responsible for repaying the advance. In a "Non-Recourse" agreement, the lender bears the loss unless the non-payment is due to a commercial dispute regarding the goods or services.

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What Is Invoice Financing: Meaning, Types, and How It Works

Unsecured business loans
12 September 2024
Katyaini Kotiyal
2,346

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What Is Invoice Financing?
How Invoice Financing Works: Step-by-Step
Invoice Financing Types in India
- Invoice Factoring
- Invoice Discounting
Key Benefits of Invoice Financing
Invoice Financing vs. Other Loans
Eligibility and Documentation
Frequently Asked Questions (FAQs)

Invoice financing is a strategic working capital tool that empowers Indian MSMEs to receive immediate funds against their outstanding, unpaid invoices. Rather than waiting 30 to 90 days for a client to settle a bill, a business can partner with a financial institution, typically a Bank or a regulated Non-Banking Financial Company (NBFC) such as Hero FinCorp, to access a significant portion of that invoice's value upfront.

This financing alternative is not just a loan; it is a liquidity solution specifically designed for B2B entities that operate on credit terms. By converting "paper wealth" (receivables) into liquid capital, businesses can meet operational costs like payroll and vendor payments without delay. This process is governed by the Factoring Regulation Act, 2011, which was further amended in 2021 to broaden the scope of NBFCs participating in the factoring business (The Factoring Regulation Act, 2011).

What Is Invoice Financing?

At its core, Invoice Financing meaning refers to a short-term borrowing tool where a business’s unpaid invoices serve as the primary collateral. It is essentially a way to get an advance on money you are already owed by your customers, improving the Cash Conversion Cycle (CCC).

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How Crowdfunding Works?

The crowdfunding ecosystem operates through three primary pillars:

Project Initiator: The individual or business with the venture that requires funding.
Backers/Investors: Individuals who contribute capital because they believe in the project.
Crowdfunding Platform: The digital intermediary (like Ketto, Indiegogo, or Faircent) that hosts the campaign and facilitates secure transactions.

Types of Crowdfunding

Crowdfunding is not a monolith; it varies based on what the backers receive in return.

1. Equity-Based Crowdfunding

In this model, backers receive shares or an ownership stake in the company. It is critical to note that, according to the Securities and Exchange Board of India (SEBI), equity-based crowdfunding through unauthorised electronic platforms is currently prohibited for retail investors in India to prevent unregulated public offerings (Source: SEBI).

2. Reward-Based Crowdfunding

Popular for creative projects, this involves giving backers a non-financial "reward" like early access to a product. It is widely used as a market validation tool.

3. Debt-Based (P2P) Crowdfunding

Also known as Peer-to-Peer (P2P) lending, this functions like a loan. In India, this is strictly governed by the Reserve Bank of India (RBI) under the "NBFC-P2P" regulations. Lenders must note that aggregate exposure across all P2P platforms is capped at ₹50 lakh (Source: RBI Master Directions 2025).

4. Donation-Based Crowdfunding

Supporters contribute to social or medical causes without expecting any financial return. Donors should ensure the recipient has a valid 80G certificate to claim tax deductions.

Who Can Use Crowdfunding?

Crowdfunding serves various segments:

Startups & Entrepreneurs: For early-stage capital.
Non-Profits & NGOs: Recipients must comply with the Foreign Contribution Regulation Act (FCRA) norms if accepting international funds (Source: MHA).
Individuals: For personal medical or educational emergencies.

Top Crowdfunding Platforms in India

Ketto & Milaap: Leaders in donation-based crowdfunding.
Faircent & Rang De: RBI-registered NBFC-P2P entitiesfor debt-based funding.
Indiegogo: A global platform often used by Indian startups for international reward-based campaigns.

Advantages and Disadvantages of Crowdfunding

Advantages	Disadvantages
No Collateral: Most models (except debt) don't require physical security.	Market Risk: If the project fails, investors may lose their entire contribution.
Market Validation: A successful campaign proves demand.	Regulatory Hurdles: Equity models face strict SEBI restrictions.
Low Barriers: Easier to access than traditional business loan.	Public Exposure: Sharing ideas publicly risks IP theft.
Credit Building: Under RBI’s 2025 mandate, P2P repayments are reported every 15 days to bureaus like CIBIL, allowing for faster credit score updates (Source: CIBIL).	Platform Fees: Platforms typically charge 5% to 10% of the funds raised.

How to Launch a Successful Crowdfunding Campaign?

Define Your Goal: Set a realistic, transparent funding target.
Choose the Right Platform: Match your project type with the platform’s niche.
Storytelling: Use high-quality videos; campaigns with videos raise 150% more on average.
Engage Backers: Regulated NBFCs like Hero FinCorp emphasise transparency; similarly, you must provide frequent updates to build trust.

Risks of Crowdfunding

For Businesses: Failing to reach the goal (many platforms follow an "all-or-nothing" rule).
For Investors: Lack of liquidity and high failure rates for startups.
For All: Potential for fraud. Always verify if the platform is an RBI-regulated NBFC-P2P entity before lending.

Crowdfunding vs. Traditional Finance

Unlike traditional finance, which relies heavily on credit history and heavy documentation, crowdfunding focuses on community belief. While regulated NBFCs offer stability and larger loan amounts for established needs, crowdfunding offers speed for niche projects.

Frequently Asked Questions

Is crowdfunding legal in India for business?

Yes, but the model matters. Donation and Reward models are legal. Debt-based (P2P) is legal only via RBI-registered NBFC-P2P platforms. SEBI prohibits Equity Crowdfunding for the general public.

Is crowdfunding taxable in India?

Yes. For businesses, reward-based funds are treated as business income. Under the Income Tax Act, donors get 80G benefits only if the NGO is registered and the donor follows the Old Tax Regime (Source: Income Tax Dept).

Does crowdfunding affect my CIBIL score?

Yes, if using a registered P2P platform. Effective January 1, 2025, lenders report data every 15 days. Timely repayments will boost your score faster than previous monthly cycles.

RBI Compliance Disclaimer

Disclaimer: The information provided in this blog is for educational purposes and does not constitute financial, legal, or investment advice. Crowdfunding involving debt (P2P) is subject to market risks and RBI regulations. Equity crowdfunding is prohibited for retail investors in India. Hero FinCorp is a regulated NBFC and does not directly provide crowdfunding services. Readers should consult a certified financial advisor before committing funds.