Risks In Invoice Discounting And How InvoiceX Helps?

In the 21st century, your portfolio deserves a healthy portion of alternative investments. Alternative investments are riskier because they offer potentially high returns, however they also offer a level of diversification to your portfolio, which can otherwise be skewed towards traditional FDs or mutual funds.

So, let Grip introduce you to invoice discounting, a powerful alternative investment option  that can  get you higher returns. 

What Is Invoice Discounting And How Does It Work?

Invoice discounting is a short-term credit instrument for businesses. A business generates an invoice against a buyer for credit sales. The business can discount (sell) its unpaid invoices to a creditor. Let us understand the process of invoice discounting in detail with the help of an example:

1. Mr Prakash sold clothes on credit to Mr Zaib.

2. P issued an invoice against Z. Z has to pay P within 90 days.

3. However, for some reason, P needed money before the expiry of the invoice.

4. P went to an investor with his invoice to get it discounted.

5. The investor gave the invoice amount to P after deducting a small percentage.

6. After 90 days, when the invoice amount becomes due, the money goes to the investor.

7. The percentage which the investor has deducted is his profit.

8. P is ready to pay the price because it is the cost of getting money before it becomes payable.

Now that you understand the process of invoice discounting clearly, here are the advantages of this alternative investment option and the risks in invoice discounting.

After evaluating and contrasting, one can build a portfolio that has the advantages of alternative investments whilst mitigating the risks in invoice discounting.

Benefits Of Invoice Discounting

Invoice discounting is a very advantageous alternative source of investment which provides benefits to all the parties involved in its process.

A. Benefits To Sellers

1. Sellers do not have to wait for their money. 
2. Production process and business are not halted due to lack of funds.
3. A seller will not shy away from doing business on credit.
4. Invoice discounting makes credit cheap and easily available. It is easier to get an invoice discounted than approval of bank loans.
5. Invoice discounting facility ensures a regular and steady flow of funds. Thus business can easily take advantage of new opportunities that come their way.

B. Benefits To Buyers

1. Buyers will get favourable terms of credit.
2. They do not need barter quality products for the availability of credit.

C. Benefits To Investors

1. Invoice discounting offers higher returns compared to traditional investments like Fixed Deposits and Physical Gold.
2. Returns are received over a very short period.
3. Since it is a form of debt for both the buyer and seller, there is always a risk of default.
4. In case of default, there are often means to safeguard investor interest.

Use Cases Of Invoice Discounting

The various use cases of invoice discounting are listed below.

1. Aid To Cash Flow

Unpaid invoices might cause cash to become a hindrance to a sustainable cash flow. Suppliers would not generally hold off on collecting bills until a business’ clients have paid. This is especially true for business-to-business transactions, where maturities of 30, 60, and even 90 days are somewhat common. By supplying the cash soon after the invoice is raised, invoice discounting can effectively eliminate this problem.

2. Cover During Emergencies

Getting the money together might be a little challenging when a business emergency occurs, such as when a crucial piece of equipment breaks. A bridge between obtaining a long-term loan and delivering the money up front is offered by invoice discounting.

Invoice Discounting Vs Invoice Factoring

Invoice factoring is a financial service where a business sells its unpaid invoices to a third party (called a factor) at a discount. The factor pays the business upfront and then collects the full payment from the customers when the invoices are due. It helps businesses get quick cash without waiting for customers to pay.

Invoice finance includes both invoice discounting and invoice factoring, which extend credit against unpaid bills. In both cases, there are some notable distinctions:

1. Credit Control

The business's sales ledger is not under the control of invoice discounting service providers. Whereas in case of invoice factoring the business's sales ledger is completely under the control of invoice factoring service providers.

2. Non Payment

In case of sale of invoice to a factoring business and the client fails to repay it, the business will not be responsible for repaying the money. This is known as non-recourse invoice factoring. Non-recourse factoring has higher fees, but it might provide you with peace of mind in certain situations. Non-recourse invoice discounting is not typically possible because it is a loan, not a sale, and the money must always be paid back.

3. Scale Of Risk

Invoice discounting can be riskier for lenders compared to invoice factoring. As a result, large companies with reliable clients usually prefer invoice discounting. On the other hand, smaller businesses often choose invoice factoring because it’s more accessible to them, although it’s not always their first choice.

How To Implement Invoice Discounting?

Businesses can access money associated with overdue invoices through a financing product called invoice discounting. The following actions can be taken to apply invoice discounting:

1. Create And Send Invoices: Businesses provide clients with goods or services and send invoices for credit sale.
2. Sell To Invoice Discounting Companies: An invoice discounting company will purchase the invoices from the business and lend the money less a fee from the invoices' value.
3. Payment Of Invoice: When the client pays back the invoice due it is credited to the entity who discounted the invoice.

What Is Confidential Invoice Discounting?

Confidential invoice discounting is a financing method where the process is kept private. The customers of the business are not aware that their invoices have been used to raise funds.

However, unlike invoice factoring, the business is responsible for collecting the payment from customers once the invoices are due. This added responsibility is a drawback of maintaining confidentiality.

Risks In Invoice Discounting

Nothing is perfect in this world. Although invoice discounting is a good source of alternative investments, there are some risks in invoice discounting. Let us  elaborate on them in detail.

1. Credit Burden

Invoice discounting is like taking on someone else’s evil. Although debt is the safest form of investment, invoice discounting is too similar to extending a loan against the mortgage of unpaid invoices. The seller chooses to discount due to a lack of liquid money. The same problem can easily arise for an investor. If you do not choose which bills you discount, given the limited money, you can get stuck with treacherous debt.

2. Singular Invoice

Every investor has a limited pool of money. It is impossible to get multiple invoices discounted at once. Therefore, for traditional invoice discounting the burden of choosing which bill you want to get your money tied in falls on an investor.

3. Regulatory Framework

Traditional forms of discounting do not come under the purview of regulatory authorities like SEBI or RBI. This makes it difficult to gain investor confidence. The unavailability of regulatory oversight opens doors for deceit and loss. 

4. Rating

Unlike many other traditional or alternative sources of investment, invoice discounting is not a rated practice. This means that the bills which are available to be discounted are not rated on parameters like:

• Risk,
• Reward,
• Terms of payment,
• Chances of default, etc.

Thus, in traditional discounting, a customer has to rely on intangible parameters to safeguard his investment.

5. Credit Score

The credit score and creditworthiness of your company may suffer as a result of late payments and defaults. Without an emergency fund in place, you face the danger of customers not making payments on time or at all, which might lower your credit score as an individual or as a business. Your future borrowing costs are likely to increase with a lower credit score.

6. Nature Of Work

Running an invoice discounting business takes effort. Instead of simply raising the invoices, moving on, and then occasionally following up if a deadline has passed, invoice discounting necessitates taking the time to decide which of your customers consistently pay on time each month, which invoices you want to use for discounting, and making sure that payment is made ahead of the lender's deadline.

How Can InvoiceX Help You Mitigate These Risks In Invoice Discounting?

There is an alternative investment option that is addressing all these risks in invoice discounting.

Grip’s InvoiceX is the one-stop solution for every risk in invoice trading. 

1. A Solution To The Risk Of Credit Burden

With InvoiceX, your money is invested only into approved MSME invoices. The credibility and regulatory framework under which approved MSMEs operate reduces your credit budget. Your investment is not unnecessarily tied down with sick units.

2. A Solution To The Risk Of Singular Invoice

With InvoiceX, mitigate your risk one step further by diversifying your pool. Your investible money gets exposure to a diverse range of invoices. Thus, reducing risks in invoice discounting.

For example: InvoiceX Farmart 170, is an InvoiceX opportunity with a diversified pool of 170+ invoices.

3. A Solution To The Risk Of Regulatory Framework

InvoiceX by Grip Invest cares about your security. This financial instrument comes under the purview and regulatory oversight of RBI.

4. A Solution To The Risk Of Rating

The instruments are credit-rated for greater transparency and investor confidence. You do not have to rely on unknown and uncomfortable parameters to measure the credibility of instruments any longer. 

Following are some additional ways Grip Invest is trying to make a difference in your life and reducing risks in invoice discounting.

5. Tax Benefit

Only the interest component is taxable for the investor. Grip knows you deserve that trip with your friends and family.

6. SEBI Backed Security

InvoiceX opportunity comes with an additional security cover that helps in protecting the investor’s investment. Also, the cashflows are managed by a SEBI registered trustee, adding an extra layer of security.

Conclusion

Invoice discounting allows businesses to access immediate cash by selling their pending invoices, which are due in 30, 60, or 90 days, at a discounted price. When the invoices are paid, investors earn a return as the difference. However, this process carries risks, such as invoice defaults and the lack of a robust regulatory framework.

InvoiceX offers a solution to these risks. It is a regulated invoice discounting product that reduces risk through diversification by investing in a pool of invoices rather than a single one. To explore more alternative investment opportunities, sign up on Grip Invest today!

Frequently Asked Questions On Risk In Invoice Discounting

1. What is the TReDS platform?

The Trades Receivables electronic Discounting System or TReds is a digital platform enabling the discounting of bills for MSMEs for large corporations. The bills or invoices which are available for discounting are comparatively safe for the following reasons-

• MSMEs are backed by government support.
• The bills are against large corporations. 

2. Is invoice discounting a short-term or long-term investment option?

Invoice discounting is usually a short-term practice. Invoice discounting is the process by which companies take short-term loans against invoices issued against credit sales. InvoiceX is a regulated short term invoice discounting option that helps you earn fixed returns in a short period of 6-9 months.

3. How can invoice discounting help a business?

Invoice discounting helps all parties involved in the process. The advantages of discounting are as follows-

Benefits to sellers

• A seller does not have to wait for his money. 
• His production process and business are not halted due to lack of funds.
• A seller will not shy away from doing business on credit.

Benefits to buyers

• Buyers will get favourable terms of credit.
• They do not need barter quality products for the availability of credit.

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