How Is Invoice Discounting Profitable for Businesses?
MSMEs (Micro, Small and Medium Enterprises) play a crucial role in the economic development of our country. While these businesses used to face difficulties in accessing credit, the situation has improved with an increase in financing options, such as invoice discounting in India.
Every business requires capital for its growth and expansion. However, inadequate cash flow and low credit scores are some of the main reasons commercial banks refuse to lend money to MSMEs. An effective solution to this problem is working capital solutions like invoice discounting.
How Does Invoice Discounting Work?
As the country’s internet accessibility improved, an increasing number of fintech companies have emerged, offering flexible credit facilities to underserved borrowers. Invoice discounting in India is one such financing option that has helped numerous MSMEs establish themselves.
It is a short-term alternative financing option that enables businesses to use unpaid invoices as collateral to avail loans from third-party fintech service providers. Now, let us look at the steps involved:
Step 1: A business sells products to customers and raises invoices mentioning the payment amount and date.
Step 2: To finance the business’s working capital requirements, the seller approaches a fintech service provider and presents these invoices as collateral to apply for a loan.
Step 3: The invoice discounting service provider goes through the invoices, evaluates the buyers’ creditworthiness, and disburses a short-term loan.
Generally, the loan amount is a percentage of the total invoice amount. Moreover, the borrower has to pay a fee of 1% to 3% of the loan (1).
Step 4: The borrower repays the loan to the invoice discounting company after receiving the full payment from his/her customer.
KredX is India’s largest supply chain finance platform. It offers invoice discounting as a solution that helps businesses reach their full potential. Leveraging cutting-edge technology, it customises financial solutions depending on the type and nature of business.
How Is Invoice Discounting Profitable?
Let us discuss the benefits of invoice discounting:
- Access to instant cash helps a business make the necessary payments well in time, improving its credibility.
- The entire process is not time-consuming, and the documentation process is smooth and hassle-free.
- Invoice discounting helps maintain a healthy cash flow, which is vital to maintain a business’s financial health.
- Medium-sized enterprises can use invoice discounting to generate a revenue stream. It would make it easier for businesses to engage in financial planning and explore newer investment opportunities.
- A significant benefit of invoice financing is that it frees up locked funds without much effect on the asset-liability balance.
- Another crucial benefit is that the expense associated with invoice discounting is not high.
- It helps businesses focus on their main purpose as they don’t have to chase their customers constantly. Instead, enterprises can concentrate on how to make organisational practices more efficient and improve sales.
Things to Remember about Invoice Discounting
Listed below are important factors that enterprises need to take note of:
- The business type and operational size will determine whether the enterprise should opt for invoice discounting or factoring.
- A business can opt for invoice discounting if the payment terms get established with a minimum 30-day grace period (2).
- A company with a good history of invoice payment collections will receive an added advantage.
Invoice or bill discounting in India is gradually emerging as a popular short-term financing option. It helps enterprises use their unpaid invoices to maintain the flow of working capital. There are numerous benefits to opting for this credit facility. The most important one is that it helps businesses increase their credibility and profitability.