Invoice Discounting platforms work like matchmaking services for Businesses with Invoices and Investors seeking alternative financing solutions with high returns. Such platforms host a range of Investors from Individual Investors to Banks and NBFCs. Considering the fact that Indian businesses face a delay of 65 days to get payments from the day of Invoicing (*according to 2016 survey of Atradius on B2B Payments in APAC), there is a burning requirement among businesses to get easy access to cash. Invoice Discounting platforms serve this purpose as the tenure for this facility generally ranges from 30-90 days.
Even with all the positives about the product, it is not a zero-risk investment product. While the investors earn high returns on their investments, they should always remember the investment principle that higher the return, higher the risk. This article addresses the inherent risks involved in Invoice Financing.
If you are considering purchasing invoices through Invoice Discounting platforms, here are five things you should keep in mind:
Higher the return, higher the risk
Similar to the traditional banking system, Invoice Discounting platforms also set higher discounting rates for businesses deemed to be less creditworthy based on traditional factors such as credit scores and credit histories.
Investors who choose to purchase Invoices with a low score, in return can expect higher discounting rates, but they should also understand the credit risk as some credit hungry/desperate businesses are ready to shell out higher amounts to get access to funds. The chances of a default by businesses are rare but not absent. Hence, it is always advisable to diversify your portfolio and invest using your surplus capital.
The business owes the responsibility of Repayment
If a Business defaults on the repayment, the responsibility of repayment is on Business only, not on the Invoice Discounting platform. The platform ensures the security of Investor’s money by keeping legal documents like Service Agreement and Transfer Agreements in place for the Investor but they do not assume any credit risk on behalf of the seller of invoice.
You can invest in Invoice Partially
Investors while purchasing these invoices have the flexibility to fund a percentage of the Invoice Amount rather than 100% funding. The minimum contribution from investor varies from one platform to another. It also depends on the funding requirement of the Business. Investing in these invoices partially can also help in diversifying the risk, so you don’t have all your money tied up with one business.
Be Aware of Fees
The Invoice Discounting platforms charge minimum fees from both businesses and financier. These charges cover the charges for legal documents, processing charges of deals and other operational charges.
Such Fees are disclosed in the agreements and are told upfront to both Businesses and Investors.
There is no prepayment penalty
Consider a scenario when the Business got funds from its client earlier than the due date. In this case, Invoice Discounting platform will process the repayment accordingly without charging any prepayment penalty and transfer the amount to invest.
Despite getting money early, the investor has the flexibility to invest in one of the existing deals ensuring that there is no potential loss of discounting gains.
Investments are informed decisions and before stepping into any option, one should evaluate all the factors and read the policy and other legal agreements well. After all, in the end, it is Your hard-earned money that is invested.