India has experienced remarkable growth in both retail and e-commerce industries over recent years. India was predicted in 2017 that revenue generated for these sectors would increase from US$ 39 billion in 2017 to US$ 120 billion by 2020; marking 51% annual growth. No other country can boast this achievement!
India has one of the highest penetration rates for online retail market segments, but customers are now showing greater preference towards purchasing other products through e-retail platforms – leading to an increase in products to meet customers’ various demands.
Retail and e-commerce industries face many obstacles in managing daily operations and clearing unpaid invoices, necessitating quick access to working capital. Invoice discounting provides quick relief by freeing up cash sitting in unpaid invoices – retailers and e-commerce alike need products from their suppliers, while suppliers often wait 30 to 90 days for payment; other hurdles could include upfront payment to sellers, delayed receivables, prolonged and delayed payment cycles, high overhead costs and operational inefficiency that might further complicate matters further.
What is invoice discounting?
Vendors or merchants that receive bills receivable from clients usually honor them after an agreed upon period, creating a time lag between delivery of goods and payments being received. To combat this situation, vendors can take their approved bill receivable to any participating bank or financial institution to get discounted or sell at a discount for cash up-front.
Invoice discounting is the process by which businesses leverage receivables to secure short-term funding needs. Small and mid-sized companies issue invoices against larger corporations (blue-chip companies), often for services provided or products supplied, to avoid delays. They bring these invoices directly to an invoice discounting platform where within 1-2 days they are converted into funds at a discount rate that varies based on risk analysis, market acceptability and tenure (typically 30-150 days).
How does invoice discounting benefit retail and e-commerce companies?
Invoice discounting services provide multiple advantages to retail and e-commerce industries.
- Unlock trapped cash by clearing unpaid delivery invoices: Enjoy hassle-free working capital within 24-72 hours of clearing unpaid invoices, increase cash flow with no collateral policy, and keep inventories updated by making optimal use of unpaid invoices.
- Manage Your Supply Chain Efficiently: By fulfilling orders quickly with access to working capital at all times and running an efficient supply chain from retailers to suppliers resulting in improved customer satisfaction, your supply chain should function at peak performance.
- Use quick access to liquidity to accelerate business expansion: Increase orders through timely payments leading to more orders, which in turn increase sales resulting in business expansion, whilst simultaneously expanding your reach by connecting with larger retailers or online marketplaces that fulfill orders more efficiently.
How are invoices settled, and why is this necessary?
Deferred credit transactions have become an increasingly common way of conducting transactions. For instance, when businesses sell goods or provide services to their clients they often offer payment terms of 90-120 days as part of an invoice agreement. Businesses often outsource invoice payments to third-party financing companies that buy the accounts receivable from them. On acceptance, the finance company agrees to pay a specified percentage of the face value (often 80 percent) less interest charges for credit periods (such as 60 days). When customers make their payments, any balance due will be returned back to businesses by deducting a service fee and issuing exchange vouchers in accordance with the Negotiable Instrument Act 1881.
An invoice discounting financing solution provides a way to bridge the credit gap between small and large enterprises by making it simpler for SMEs to access export finance without providing hard collateral or business financials as security.
Features and benefits of invoice discounting:
- No collateral required. You just have to present the raised invoice to the lender.
- The seller retains invoice ownership.
- Get financing of 90% of the invoice amount.
- Get financing offline or online.
- Financing amount’s quick disbursal.
- Lenient eligibility criteria.
- Low-interest rate.
Methods involved in invoice discounting:
- With Recourse: Lending institutions conduct an intensive round of verification on the documents submitted by sellers and submit them for validation by their bank. If the bank determines that there has been a default on payment by either of them, they could become responsible for any potential debts owed by either of them.
- Without Recourse: The lending institution does not conduct any verification on invoices and documents provided by sellers, nor do they check with their bank accounts.
What are the factors on which invoice discounting depends?
- Company’s financial turnover.
- Financing amount needed for the business.
- Total amount of the invoices.
- Business customer base.
- Visibility of the business.
Why do you prefer invoice discounting?
Invoice discounting provides businesses with the means to continue operating without worrying about cash constraints or lengthy loan applications. With this short-term financing solution, cash can be secured without collateral requirements; alleviating invoice backlog and providing you with extra funds for everyday business expenses. Customers don’t need to chase you for bill amounts any longer! Instead, let them manage their finances freely while still having enough money on hand for ongoing costs.
Does this financing method suit newly formed and small businesses?
Yes, lenders in the market welcome applications from newly formed small businesses and finance their invoices. Lenders take into consideration your current sales volume and potential for growth when considering whether to approve financing for your invoices.
Falcon Invoice Discounting has made invoice discounting investment possible for individuals by providing multiple platforms to facilitate investment depending on risk and other considerations. Minimum investments vary with each platform and could start as low as Rs. 25,000 for minimum investments on some platforms. Invoice discounting platforms provide verified vendors and enterprises with investors seeking returns. Businesses use invoice discounting platforms to list unpaid invoices that need working capital, while investors provide instant cash assistance and then reap returns within 30-150 days of investment. Investors could include anyone from individuals living in India, HUFs/proprietorships registered in India, institutional investors like banks/NBFCs/other financial institutions as well as NRIs.
Guest article written by: Anji Velagana, a graduate in Electronics and Communication Engineering from Jawaharlal Technological University, Kakinada. He has 5 years of experience in content writing. He is currently working as a Digital Marketing Analyst and Content Contributor for Falcon Invoice Discounting.