Why invoice discounting is becoming popular with retail investors on fintech platforms

Invoice discounting is one of the quickest and easiest ways to offset the impact of unpaid accounts receivable on cash flow. The concept allows businesses to instantly access cash by selling an invoice to a third party or finance company.

With innovative financing solutions like bill discount, businesses can improve cash flow and strengthen the working capital cycle for uninterrupted operations and sustainable growth. Companies rely on cash while waiting to liquidate their receivables.

Invoice discounting can help unlock money trapped in the supply chain and allow companies to explore new business opportunities.

Investors are constantly looking for investment avenues outside of the traditional routes for better returns. Interested in maximizing profits in a short period of time, they consider alternative options such as discounting invoices to avoid a long delay or any other dilemma.

Previously, banks managed the invoice discounting process and provided immediate credit to vendors on invoices receivable. But now, this avenue is open to retail investors, and they are showing great interest on different fintech platforms.

How are invoices paid and why is it necessary?

Many transactions are settled using deferred credit systems rather than instant cash payments. For example, a business sells goods or provides a service to a customer. The seller invoices the customer, granting him a period of 90-120 days pay. The company then sends the invoice to a third party, a finance company that purchases the company’s accounts receivable. Upon acceptance, the finance company agrees to pay a certain percentage of the face value of the invoice (~80%) after deduction of interest charges for the credit period. After the customer has made a payment, the balance of the invoice is returned to the company minus a service charge. Traders generally issue the vouchers for purchases and sales after a specific time period previously agreed under the Negotiable Instruments Act 1881.

An invoice discounting financing solution helps bridge the credit gap between small and large businesses by making it easier for an SME to access export financing without any physical or financial collateral.

Invoice discounting speeds up customer cash flow and businesses don’t have to wait for customers to pay within their credit terms. Businesses normally pay a percentage of the invoice amount to the lender as payment for borrowing money.

Why Invoice Discounting Attracts Retail Investors

Although some risk factors are involved in the process, bill discounting attracts a massive number of investors to fintech platforms. The only criterion to avoid any risk of payment is to analyze the brand value of the company and check its credit history. The minimum investment amount may vary for each platform and can be as low as 50,000 rupees. The goal for investors is to grow their money while protecting their funds. And it is the sole responsibility of bill discounting platforms to connect verified investors and yield-seeking sellers.

There are different platforms where companies send their unpaid invoices to get working capital. Investors/finance companies help these companies to collect instant cash and get a return within 30-90 days agreed in advance after their investment. Any individual, institutional investor, bank or other financial institution can get invoice discount with basic predefined KYC guidelines such as PAN card and verification of valid Indian address proof.

Bill discounting is a short-term investment plan that offers higher returns, and this is one of the main reasons why it is attracting interest from retail investors, as funds increase in 90 to 120 days. At the end of the funding tenure, investors can get the principal amount with handsome profits. Investors can earn more each year by continually reinvesting returns from previous investments.

Fintech platforms enable a hassle-free experience for investors when it comes to getting a lucrative return on their investment.

They benefit from a transparent digital investment option under the guidance and management of professionals. Plus, they receive real-time updates on their investments and can access a personalized dashboard of their portfolios.

Digital access for all previous transactions and investments for current transactions contributes to better management of finances. Investors and financial companies face a rigorous verification process before entering into an agreement for the authentication of the process.

Simply put, invoice discounting can help drive business growth, providing business owners with immediate access to funds to ensure smooth cash flow and explore new opportunities. It is like a loan granted based on the strength of credit history of any business entity. SMEs can take advantage of this concept and free up their assets to ensure their future growth and avoid the pitfalls of debt.

Edited by Teja Lele Desai

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

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