Invoice Discounting in India

Introduction:

Changes in the socio-economic structure and rapid development in society have led to the origin of several start-ups and small business enterprises. These enthusiastic organizations are always in need of proper funding and efficient cash flow to thrive and maintain their expenses. Small enterprises can get their business financing from varied sources, like short term business loans, investors, invoice finance, etc.

Invoice Finance

Invoice Finance has come up as a strong option to secure short term business financing. It is a way for the business to use their high-value invoices as collateral to borrow money for their expenses. This is also known as Invoice Funding.

invoice discounting india

 

Why Invoice Finance is needed?

Generally, new businesses sell goods to wholesale dealers in large quantities on credit; i.e. the payment for the goods is not done immediately and the buyers are given a credit period of up to 30 days to make the payment. This locks the payment amount for the suppliers who have to wait until the payment gets cleared. This often results in a shortage of working capital for new businesses.

Invoice Bill Discounting

Invoice Discounting or Invoice Bill Discounting is a method to arrange working capital by a business in which the Invoice is sold to the lender at a reduced price than the one quoted on the bill. In this arrangement, the seller receives the funds much before the due date of the bill and can invest that amount for his business.

How Invoice Discounting Works?

  • When suppliers sell goods to buyers on a large scale, they send out an Invoice or a Bill with the number of goods and the payment due date to the buyer or the wholesale dealer.
  • These goods are sold on credit i.e. immediate payment is not made by the buyer.
  • The buyer wishes to delay the credit period while the seller will seek immediate payments.
  • This causes an amount locked for the supplier which otherwise could be used in the business.
  • To retrieve funds, suppliers can sell the Bill to an Invoice Discounting Company.
  • The Company gives out an immediate amount to the buyer based on that bill, but which is slightly less than the Bill amount.
  • The difference in the value of the bill and the amount paid to the supplier after discounting goes to the company as discounting fees.
  • The buyer can now utilize these funds as working capital.
  • On the due date of the bill, the supplier or the lender will collect the money from the buyer.

Features of Invoice Discounting

An Overview:

Value

Up to 90% of Invoice Amount

Availability of Funds

Immediate

Cost of Finance

Service Charge+ Discount Charge as per agreement

Collateral required

NO

Benefits of Invoice Discounting

  • Invoice Discounting is confidential process-customer information is not shared.
  • It is a suitable business finance option for small businesses that find it difficult to secure a loan.
  • Funds are released from the unpaid invoices.
  • Instant access to cash held up in invoices
  • More flexible than a loan or an overdraft
  • Payment collection is under control of the supplier
  • Invoice financing bad credit options can be used in case of Discounting without Recourse.

Small Business Invoice Loans

Small businesses that have not been into existence for long, find it difficult to get loans from the bank. They also do not possess sufficient assets and income in the initial years.

Due to a lack of business contacts, they are also not able to attract investors to invest in their business. All these challenges put impediments in their path to success.

As an alternative solution to obtain cash without acquiring new debt, Invoice Business Loans or Market Invoice Business loans can be used.

Features of Loan against Invoice India

  • Bill Discounting is an invoice business loan.
  • It helps small businesses to obtain funds almost immediately based on invoices which are already present as collateral.
  • The invoice can be sold at up to 90% of the invoice value to the discounting agency and cash can be obtained.

Methods of Invoice Discounting

With Recourse

Without Recourse

Document checks are done by the seller’s bank

No document checks done by the seller’s bank

The seller or supplier is liable for debts not paid by the customers

Non-payment of debts is liability of bank/lender

Factors on which Invoice Discounting depends:

  • Your business financial requirement
  • Your monthly turnover for your business
  • Your business visibility
  • Active clients in your business
  • Invoices outstanding amount

Documents required for Invoice Discounting

  • KYC documents of the applicant/co-applicant- PAN card copy, Address proof
  • GST registration certificate and GST returns
  • Ledger of debtor /debtors for which discounting is required
  • 6 months Bank Statements
  • Audited financials of the business

Invoice Discounting FAQs:

1. Who can avail Invoice Discounting?

Invoice Discounting can be availed by:
  • Business to Business Services
  • Manufacturers
  • Distributors

2. What is the difference between Factoring and Invoice Finance?

Invoice Finance is confidential as details of customers or buyers are retained with the seller and the customers are not aware of the discounting agreement. In Factoring, the lender or the factor contacts the buyer for payments and payments are made directly to the bank. No confidentiality of customer information is maintained.

3. Is any security required if I take Invoice Finance with you?

Invoice Discounting does not require any property security as collateral. Your debtors or your Accounts receivable ledger for which you seek finance will be your collateral.

4. How will I know if Invoice Discounting is good for me?

Invoice Discounting will work for you if you have:
  • Less bad debts
  • Customers who make timely payments
  • Customers have a minimum 30 day credit period
  • You meet the minimum turnover criteria

5. What are the advantages of Invoice Discounting?

  • A quick release of the funds
  • Paperless online process
  • No security or pledging of assets required

6. How much loan can I avail of?

The amount of loan sanctioned to you depends upon your financial requirement, credit assessment. We can grant up to 90% of the invoice value depending upon conditions.