How do lenders assess invoice financing applications?

Banks or Non-banking Financial Companies (NBFCs) look at several key factors when evaluating requests from businesses for invoice financing:

• The business's financial health: They review a business’s  past financial statements, tax returns, bank account records, and other documents to get an overall picture of profitability, revenue trends over time, cash flow, debts, and other aspects of financial health. This helps them gauge the business's ability to repay any financing.
• Individual invoices: Banks or NBFCs closely examine the actual invoices against which a business wants to get financing. They check that the invoices are to creditworthy customers for legitimate commercial activities, clearly specify payment terms and deadlines, and meet any other criteria the loan provider has set. This minimises the risk of non-payment.
• Customer credit: In-depth credit checks are done on the key customers who account for the invoices a business wants to finance. The financial institutions verify that these customers have a strong history and track record of paying their debts and invoices on time. Businesses with such customers are seen as lower risk by lenders.
• Time in business: Loan providers generally feel more confident backing invoices from businesses that have been operating for several years and have a proven track record. New businesses with limited operating history may have more difficulty obtaining invoice financing until they are more established.

The financial institution weighs all these factors to decide whether the risk level is acceptable enough to provide invoice financing, and if so, how much funding and at what rates and terms.