What is Invoice Discounting Investment in India? – Return & Risk Analysis

What is Invoice Discounting Investment in India? - Return & Risk Analysis

What is Invoice Discounting Investment in India?

In this article, we will discuss Invoice Discounting Investment in India along with its working methodology. In addition, we will cover the best platform to use these options with risk-return analysis.

Every business records its sales transactions in the form of an invoice which details how much your client owes you when the payment is due for the product or the service rendered. Usually, invoices do not get paid instantly rather there is a credit period that is agreed upon between a buyer and a seller. As per the credit period defined in the buyer contract the invoice’s due date gets calculated.

Waiting for your customer to pay the invoices puts a strain sometimes on your cash flows and production activities. That’s when invoice discounting comes in pictures let’s understand this.

Invoice discounting is a new method of getting your invoice financed from a lender who gives you a certain percentage of your unpaid invoices in return for a fee. Therefore, Invoice discounting facilitates instant access to cash that is tied up in unpaid or overdue invoices from your customers. Above all provides business with a cash flow boost and tap the value of their sales ledger.

Alternatively, it’s a short-term loan extended by a lender known as invoice discounting companies using your unpaid invoices as security. Once your invoices get paid by your customer in a trust account operated by these companies, they will deduct the fee or interest agreed for that period and refund the remaining amount into your account.

Also Read List of Government Bonds in India – Short-Term and Long-Term Bonds

How Invoice Discounting Works


Let’s check out how this works with the help of an example:

There is a businessman named Robert who runs a business of packing material and supplies to HUL on a credit period of 90 days. As 90 days is a long period that puts Robert’s business at cash flow risk at times. So he just started the invoice discounting facility with one such firm ABC.
Whenever he supplies to HUL he raises an invoice for the material supplied. Consequently, there is an agreement between firm ABC and Robert that the advance percentage of 80% of the unpaid value of the invoice will be credited to Robert’s account, and for 90 days firm named ABC will charge a fee of 3% on the invoice total.

Let’s say the invoice value is Rs.10000 so the fee company will charge for 90 days would be Rs.300 for a loan sanctioned for Rs.8000.

Once HUL settles the payment for the invoice, the amount will be credited to the trust account operated by firm ABC, they will deduct Rs.300 from the total plus loan principal amount of Rs.8000 and pay the remaining Rs.1700 to Robert.

Also Read India Post Gold Coin – Gold Coin Rate 2021 | Can I Purchase Gold Coin from Post Office?

Invoice Discounting Companies

Here are the top 5 Invoice or Bill Discounting platforms that facilitate discounting facilities to businesses:

M1 TreDsThis is set up under the approval of RBI to facilitate the discounting of invoices to MSMEs. It’s a digital marketplace to sell the unpaid invoices/receivables to banks/NBFC to provide finance on a PAN India basis.
KredX’sFounded in 2015 to accelerate business growth by solving cash flow challenges. Above all, it offers investors with unique opportunity to make high returns with low-risk investments.
OmozingOffers discounting facility to sellers who raise invoices on blue-chip companies. Moreover, allows businesses to use outstanding invoices as collateral to get quick working capital loans.
Tata CapitalTata Capital also deals in invoice discounting business and gives credit to customers to improve cash flows
and liquidity of your business. But provides credit to vendors dealing with selected corporates only which are approved by Tata Capital.
Receivables Exchange of India LtdIt’s a joint venture between the small industries development bank of India (SIDBI) and the National Stock Exchange. It operates the TreDs platform as the guidelines issued by RBI. It promotes the growth and development of micro, small and medium enterprises for sustainable economic and social development.

Also Read Sovereign Gold Bond : Best Returns on Gold Investment

Return and Risk Analysis


Before investing in an invoice discounting mechanism ensure you are aware of the risk involved in this method.
Let’s understand the risk you may encounter as a business while dealing with invoice discounting companies:

1- Denied Invoice Discounting

Before disbursing the amount, invoice discounting companies check the creditworthiness of your debtors.
If a major buyer of your encounters financial difficulties take a hit on credit rating can result in denial of invoice discounting if you rely too much on discounting options for running the units.

2- Invoice Rejection


In case you have availed of invoice discounting for certain invoices.
But the buyer can reject the invoice on grounds of low-quality material, incorrect quantity, or wrong application of taxes on your invoice.
In such a scenario your credit period will be extended in credit period is the basis of receipt of invoices.
In such a scenario, discounting comes as a saviour to meet the working capital requirement but you end up paying more interest for the extended credit period.

Also Read IPO vs Shares(Listed) – Difference between IPO and Listed Stocks in India

3- Variety of Debtors

Discounting works best when you have a variety of debtors in your kitty as it diversifies your risk to a substantial amount.
In such a scenario, if one buyer defaults on outstanding invoices and for the same credit period you have other buyers who settle the amount on time still you can manage to reduce the pay the same interest amount and can settle the credit.

4- Idden Cost


While dealing with invoice discounting, you should be aware there could be other costs like processing fees, administrative charges, due diligence fees, and creditworthiness checking fees.

So do read the terms and conditions outlined by financing companies carefully while signing their contracts otherwise, you end up paying more for the product or services rendered.

Also Read What is a Rights Issue of Shares? | Rights and Bonus Issue | Example | Eligibility | Types

5- Over Reliance on Single Client

Don’t rely blindly on a single client when dealing with invoice discounting options as it could be very risky,
and do these companies will not factor the risk of invoices getting overdue.

Ensure as a vendor you do a strong follow-up with your buyer to get your invoices paid on time to avoid any adverse situations which may hamper your relationship with the buyer.


What is the difference between factoring and invoice discounting?

Both types of invoice finance can help you to improve cash flow and better manage your working capital.