Every organization needs money to work and grow. After all, in this fast business world you don’t want your competitors sprinting past or ahead of you. They were able to seize an opportunity due to liquidity. However, this can be a problem for some businesses that have difficulty managing their cash flow especially if payments do not come quick enough from clients which is often the case for small and medium enterprises (SMEs).
This is where invoice discounting steps in and provides a much-needed solution to not only help businesses manage their cash flow healthily again. But also giving it an attractive opportunity for investment on the part of investors. Today, in this blog post, let’s discuss what invoice discounting investment is and how the same works here as well as the benefits of it, risks involved in opting for these investments and why investors have started looking at them more aggressively now.
Understanding Invoice Discounting Investment
Invoice discounting is a financial service that allows businesses to tap the value of their unpaid invoices before they are due. Rather than waiting for the payment period- which can be from 30 to more than 90 days, businesses sell invoices at a discount rate (usually around $0.99 on dollar) to another party. This gives business owners a cash due, providing them with the ability to pay for operating costs in order to grow or simply maintain financial health.
Invoice discounting is a profitable opportunity for investors to earn returns by buying such discounted invoices. That the steroid investors get full value on the invoice when it is paid by debtor, so in essence make difference between purchase for and obviously zero anyways that a good return.
How Does Invoice Discounting Work?
Easy to understand, invoice discounting requires several stage:
- Invoice Issuance: A business sells goods or services to a client and mails out an invoice with payment terms which are usually between 30–90 days from now.
- Selling the Invoice: The business does not wait for payment against invoice and sells it to a financial institution or an online platform like Credlix. The discount paid on the sale of an invoice typically means that a business receives around 80%-90% of its face value upfront.
- Advance Payment: The platform/financial institution, in this scenario, also lends out a discounted amount to whomever is accepting early payment to them or provides an advance.
- Invoice Settlement: Once the invoice is paid by the client (according to its due date), pass them through and process / pay your business less fee and discount on an VIEWPAID platform.
- Investor Returns: The investors who bought the invoice get paid in full, making a return from the difference between what they purchased it for and its entire value.
Why is Invoice Discounting so Popular in India?
The business landscape in India, especially for the small and medium-sized enterprises has grown by leaps-and-bounds over recent years. One of the biggest pain points has always been managing cash-flow, largely due to clients simply not paying up on time. As per a Reserve Bank of India (RBI) report, by 2024 over 40% SMEs in the country are facing liquidity crisis on account of delayed payments which is curtailing their immense growth opportunities.
All of this has contributed to increased demand for an effective solution like invoice discounting. A number of platforms like Credlix have been instrumental in driving this movement, with companies increasingly capitalizing on the Indian invoice discounting market. India Invoice Discounting Market was valued at approximately USD 1.5 billion in the year 2020 and is expected to grow with a CAGR of 20% over the upcoming five years.
Why Is Invoice Discounting an Attractive Investment Opportunity?
Simply put, there are several strong benefits associated with investing in invoice discounting that can make it very appealing for investors who want to diversify their portfolios:
High ROI
Invoice discounting generates better returns compared to traditional fixed-income investments. These returns are usually between 10% and 15%, per annum, based on the creditworthiness of these invoices.
Short-Term Investment
This is a short-term Investment as Invoice Discounting investments are usually for 30 to 90 days. This provides investors the possibility to quickly re-invest their capital and compound returns.
Low Correlation with Market Volatility
Invoice Discounting has Low Market Volatility Correlation: Contrary to equity markets that can be risk-of-volatility high, investments in invoice discounting are found not very liable by market fluctuations letting more or less steady income.
Diversification
Since invoice discounting enables investors to invest in numerous industries and sectors. Such diversification reduces risk and makes you participate in more businesses.
Social Impact
When you invest in invoice discounting you are indirectly supporting Small and Medium Enterprises, these happen to be the backbone of the Indian Economy. As a result not only do these businesses provide financial returns, they also aid in economic growth and job creation.
The Role of Technology in Invoice Discounting
With a platform like Credlix, it has been made easier for businesses as well as investors to participate in invoice discounting transactions. As for investors, invoice trading platforms are a fast and secure way of access to investments allowing them to crawl through deals available.
For example, companies can upload their invoices onto the user-friendly platform where investors may view all available invoices and decide which one to invest in based on perceived risk levels. Powered by sophisticated analytical techniques like credit scoring and AI-backed algorithms, the healthcare fintech strategically evaluates debtors that greatly lessen potential risks for investors.
In addition, the usage of blockchain technology in a number of invoice discounting platforms increases transparency and security. On the contrary, blockchain makes sure that there exists a tamper-proof recording of all transactions, which effectively reduces the risks associated with fraud and at exactly the same time offers an unmanipulated audit-trail.
Risks Of Invoice Discounting Investment
Invoice discounting provides regular returns and benefits to the investors of the platform but it comes with various risks as each invoice is backed by a small business. Here are some risks that investors need to be aware of when participating in invoice discounting.
Credit Risk
The inherent risk in invoice discounting is the credit risk of the debtor. The debtor defaults on the payment and thus the investor does not receive returns.
Liquidity Risk
Even though invoice discounting is a short term investment, there still remains risk associated with liquidity from debtors which may be met beyond the scheduled payment date.
Economic Risk
Cash flow problems in business either due to a general economic recession or other issues specific only to the operating sector, and thus breaking it down several companies likely default.
High Platform Risk
Invoice Discounting platform is critical in terms of reliability and security. Therefore, to protect against this potentially being a scam in disguise, please have some faith at the mercy of better establishments (like CredEx) if you are indeed an investor.
Regulatory Risk
Invoice discounting is still an evolving regulatory space in India. The profitability and attractiveness of this investment option can be affected by changes in laws, regulations or compliance requirements.
Invoice Discounting vs. the Traditional Financing Options
Invoice finance, in particular invoice discounting, is often compared with traditional forms of business lending such as overdraft or bank loan and factoring solutions for many reasons. Here’s how it stands out:
- Fast access to funds: For instance, invoice discounting allows your business quick funding in comparison to traditional bank loans which may take time.
- Debt Free: Invoice discounting enables business owners to avoid the burden of debts that are generated by bank loans. It is a sale of receivables, not a loan.
- Confidentiality: Generally, invoice discounting is a confidential arrangement so the client would not know that their invoices are being discounted. This is different than factoring, when the factor also handles collecting from your customers.
- Cost- Effectiveness: Though banks offer loans as low interest, the actual overall cost of borrowing including processing fees and collateral can be lesser than an invoice discounting.
- Flexibility: Unlike a business loan, invoice discounting grants more flexibility by allowing businesses to choose which individual invoices they wish to deduct rather than obligating them with a fixed amount of loan.
Future of Invoice Discounting Investment in India
With the increasing awareness of invoice discounting as a product and India’s magnifying SME-sector, coupled with streamlined processes this market has potential for coming up in leaps from where it stands now. This growth is also expected to be driven, in part, by the government’s push for digitization and financial inclusion.
Platforms have opened up this market and now even small investors can participate in invoice discounting. Technology will only further evolve and as such, we can anticipate other innovations in this area that includes the integration of AI for a more granular risk assessment level or Blockchain to improve security measures.
Also Read: How to Access Invoice Discounting: Eligibility Criteria and Application Process
Credlix — A Leading Invoice Discounting Investment Platform
Credflix, a renowned invoice discounting platform in India offers several features making it an attractive proposition for businesses as well as investors:
- Ease of Use: Credlix offers a light interface that encourages businesses to sell their invoices and enables investors in the location of access with specialized opportunities.
- Advanced Risk Assessment: Credlix employs advanced risk models with analytics and AI for credit scoring that helps minimize the default probability of borrowers, thereby mitigating risks associated with them.
- Transparency: All lending transactions on Credlix are transparent that allow the investor to see if he can go long or short considering the information available over debtor credit rating and payment history.
- SME Support: This is an integral way of supporting the SME ecosystem in India by aiding them with their cash flows through invoice discounting and enabling them to keep growing further.
- Competitive Returns: This application provides a great opportunity for investors who have invested more specifically, and who can choose from investing in various industries to help them achieve better profits.
Also Read: Invoice Discounting in India: An Overview and Its Economic Impact
Conclusion
Invoice discounting as an investment in India has a vast untapped market for businesses as well investors. Invoice discounting provides a meaningful way to support these two groups — the business finding it challenging to manage cash flow, and an investor who is looking for decent returns in a low risk setting.
The smart features, easy functionality and the cost transparency of these platforms take them a step ahead in this market. With Credlix, businesses can leverage the value of their outstanding invoices and investors, on other hand have an opportunity to generate competitive returns in a secure and efficient way.
Summing it all up, invoice discounting is not just another financial service but indeed an impactful resource that could help India sail through the journey of growth and development. Whatever your niche, Credlix is the perfect partner for you to achieve success in invoice discounting.
Also Read: Is Invoice Discounting the Best Choice for Your Business?
