How The Indian Economy Benefits From Digital Invoice Discounting

Market experts have been vocal about the evolving nature of the Indian economy. The recent trends have shown how businesses feel more confident in opting for alternative financing means. Funding solutions like Revolving Credit Facilities or Convertible Bonds can be crucial in rejuvenating the product market. However, invoice discounting in India has emerged as a pioneering transactional model with the potential to leave a long-lasting impression on the national economy. 

Invoice discounting is a short-term supply chain financing solution where businesses can sell off their accounts receivables to financiers for an immediate liquidity boost. This scheme has primarily benefited the MSME sector of India, as small business owners struggle to access formal credit. Leading invoice discounting platforms in India like KredX offers end-to-end management to ensure a transparent fund disbursal, enabling sustainable growth of this sector. 

How Does Invoice Discounting In India Work?

A business raises an invoice against a product or service sold to a buyer. However, longer payment terms can lead to a shortage of the unrestrained cash flow necessary to keep a business afloat.

So, a business can opt for invoice discounting facilities where a financial intermediary purchases these accounts receivables from it. This lender pays off around 90% of the invoice value upfront to the business within 24 to 72 hours. Therefore, this financing scheme allows a business to have proper wherewithal to maintain its expanding or investment plans. The balance amount is remitted to this business as a customer reimburses completely at the end of the invoice maturity period. 

Unlike other invoice financing methods, such as factoring, this transaction model notably works on a confidential basis. So, a customer is not aware of a third-party financier’s involvement. Accordingly, the working relationship between a business and its customers remains unchanged. Naturally, the company itself chases up the debt.   

Why Is Invoice Discounting Advantageous For The Indian Economy?

This fully digitised and collateral-free funding system, as mentioned before, can revolutionise the way MSMEs function in India. The Micro, Small, and Medium Enterprises [MSME] are a high-impact industry in India, comprising around 75 million small businesses. Moreover, this sector also contributes to one-third of this country’s Gross Domestic Product [GDP]. Additionally, during FY2020-21, MSME-related products had enjoyed an export share of 49.4% of All India exports. 

Despite that, the overall credit gap in this sector here is 380 billion dollars, approximately. Their lack of assets and capital makes SMEs considered high-risk borrowers by institutional lenders. Alternatively, invoice discounting platforms in India offer a flexible and lenient regulatory framework – allowing SMEs to be eligible for proper funding like any other blue-chip company. 

Consequently, this scope of overall development of the MSME sector in the long run can potentially reshape India’s economic blueprint. Releasing cash tangled up in sales receivables can accelerate a business’ working capital cycle, ensuring it can make a bid for future endeavours. This, in turn, can give the Indian product sector an edge in the competitive global marketplace.

Furthermore, opting for non-recourse invoice discounting mitigates the risk proposition for these companies as the financier takes responsibility for customer insolvency. This credit protection regarding non-payment eliminates any chance of jeopardising a small business’ workflow. 

Compared to traditional institutional lenders, invoice discounting platforms in India have shown more adaptiveness to the ever-altering nature of the market. So, they are able to offer adequate financial solutions using technically advanced automated methods. 

It must be noted that invoice discounting in India operates on a cash-flow-based matric, which is helpful for this nation’s largely uncategorised product markets. Moreover, as this funding is not a loan but an advance, it does not affect a business’s balance sheets. So, companies are able to avoid new debts. 

It must be noted that invoice discounting schemes ensure that these businesses have control over sales receivables. They are also capable of managing credit terms or negotiating other deals. This way, small businesses can retain their independent operating structure in the economic sector. 

Moreover, a dependable way of converting credit to cash will encourage these businesses to burgeon their credit sales. Interestingly, if a company wants to explore cross-border open account terms, these financial intermediaries also provide export factoring. 

Role Of The Indian Government Regarding Invoice Discounting For MSMEs

The impact of invoice discounting in India on MSMEs has managed to attract the attention of the RBI. Consequently, the regulatory body had established an online exchange called Trade Receivable Discounting System [TReDS]. This electronic platform is used for selling and purchasing accounts receivable on a bidding model under the Payments and Settlement System (PSS) Act 2007. The central bank had reiterated that a primary target of TReDS is a quick financial solution for SMEs via trading unpaid invoices. 

The Indian Government has acknowledged the critical importance of MSMEs in contributing to the Gross Value Added (GVA) in GDP. The Government has also recognised the innumerable employment opportunities created by this sector. As a result, the Indian Parliament notably amended the Factoring Regulation Act in its ’21 monsoon session. 

This amended regulation act allows more non-banking financial companies [NBFCs] to enter the foray as potential financiers for MSMEs by joining TReDS platforms. Consequently, there is a scope for these small businesses to have easier credit availability from non-traditional lenders. 

Bottom Line

Invoice discounting platforms in India continue to predominate the alternative funding means that small businesses are reaching out to. With an integrated cash flow solution, these supply chain-based financing companies have the potential to redefine the Indian economy in the near future. With the passing of the amended Factoring Regulations Act in 2021, more NBFCs now are eligible to conduct invoice purchasing trade with the MSMEs.