Invoice discounting becomes popular with retail investors on Fintech platforms
Among the many alternative investment opportunities available to investors in India, bill discount investing is now gaining popularity among retail investors.
Although it has traditionally always existed, for retail investors the opportunity to invest in these was non-existent until a few years ago.
“Invoice discounting is not a new concept in India. It was traditionally practiced by banks, but recently the opportunity has also been opened up for retail investors to participate. One of the key criteria that the investor must assessing is the credibility of the final decision-making party who will make payment at a later date,” says Vijay Kuppa, co-founder of Orowealth, a fintech wealth management and investment startup.
But before we understand what invoice discounting is, let’s first understand the nuances of paying a business.
How are invoices paid?
Nearly 90% of transactions are settled using deferred credit systems, such as notes receivable and the like, rather than instant cash payments. So, what actually happens is that bills of exchange are issued by traders or sellers for purchases and sales, and they are honored after a specific time agreed in advance. This bill of exchange is also a negotiable instrument under the Negotiable Instrument Act, 1881.
Suppose you are a paper company and you supply paper to a copy manufacturing company. Thus, you will deliver the paper to the company, write an invoice and send it to them for verification and approval.
Once the company accepts the invoice, it becomes an invoice for you and an invoice for the other party (the manufacturing company). Now, depending on the payment terms, you will be paid within 30 days, 60 days, 90 days or more. This payment cycle varies from company to company.
What is invoice discounting?
Approved receivables, which vendors or merchants receive from their customers, are honored after a specified time. This therefore creates a time lag between the supply of goods and their payment. To solve this problem, sellers go to any participating bank or financial institution and obtain a reduction of the said invoice receivable, i.e. they sell it at a reduced price for an initial payment.
“Invoice discounting is the process by which businesses leverage their receivables to obtain financing for short-term needs.” Small and medium enterprises charge large enterprises (blue chip companies) for services provided or goods provided. To avoid the delay, they bring their invoices to their favorite invoice discounting service platforms, and within 1-2 days, these invoices are converted into funds and transferred to the companies at a defined discount rate based on risk assessment and market acceptability and tenure (typically ranging from 30 to 120 days),” says Anurag Jain, Founder and Executive Director of KredX, an invoice discounting platform.
Say, for example, a copy making company owes you Rs. 1 lakh for supplying paper. According to their policy, they will honor the invoice after 90 days. So, for 90 days, the Rs 1 lakh, which is the payment to be received in your account, is locked. So, you approach the bank and sell them this invoice receivable for, say, Rs 90,000 in instant cash. The bank will then collect Rs 1 lakh from the paper-making company after 90 days. By doing this, you immediately get money for the services rendered, and the bank will earn 10,000 rupees from this transaction.
“Imagine there is an e-commerce platform that allows thousands of sellers to sell their products on the platform. Whenever someone buys products on this platform, the payment to the platform -form is real-time, but the platform usually has a 90-day credit period for payment to sellers, so for 90 days, the working capital of the seller is tied up, and if he wants to l money to fund his business, he may resort to financing.Since these vendors are usually smaller in scale of operations, bank financing is not a preferred option as it is time consuming and involves a lot of paperwork. Instead, these sellers resort to invoice discounting,” adds Kuppa.
How can retail investors invest in bill discounting?
There are many platforms, such as KredX, Orowealth, and TradeCred, among others, that have made it easy to invest in bill discounting, based on risk and other factors. The minimum investment amount varies with each platform, and it can be as low as Rs. 50,000.
“Invoice discounting platforms connect verified vendors and businesses with investors looking for certain returns. Businesses come to the platform to list their unpaid invoices for working capital Investors help these businesses with instant cash and get returns within 30-90 days of their investment An investor can be anyone – individual resident, HUF/ India registered business, investors institutions, banks/NBFCs/other financial institutions or NRIs (who have an NRO account and comply with the predefined basic KYC guidelines i.e. PAN card and Indian Proof of Address), says Jain .