Invoice Discounting Investment: What Is It and How to Invest

Today, several investors are looking for alternative investments to diversify their returns. These investments have little correlation with the broader market, so they can maintain their values even in market downturns. 

Some fintech platforms allow investors to offer credit directly to trustworthy businesses. Invoice discounting is one such credit facility where investors can directly offer credit. This serves as a short-term investment opportunity which can generate high returns. 

Now, let us explore essential details regarding this new investment option.

What Is Invoice Discounting Investment?

Invoice discounting is an alternative financing option that helps small businesses to meet their working capital requirements. The underlying concept is making use of unpaid invoices to avail funds from third-party fintech service providers. 

Some fintech platforms allow investors to offer credit directly to vendors and enterprises against their invoices. That is invoice discounting investment. With KredX, one can get returns as high as 15% within a time frame as short as 30-90 days.

Benefits of Invoice Discounting Investments 

Let us start by exploring the benefits of investing in invoice discounting: 

• Investors can earn returns in a short period, i.e. within 30 to 90 days.
• Invoice discounting investments offer higher returns than traditional investment options such as FDs (Fixed Deposits), debt and liquid mutual funds and RDs (Recurring Deposits). 
• It helps in portfolio diversification which is necessary for mitigating risks. 
• This investment option is associated with relatively low risks. 
• Fintech service providers use advanced technology, which facilitates a smooth and hassle-free experience for investors. 

How Does an Invoice Discounting Cycle Work?

Invoice discounting is becoming increasingly popular as a way to free up cash tied in unpaid invoices. But how exactly does this financial arrangement work? To understand the complexities and dynamics of an invoice discounting cycle, let’s dive into a step-by-step explanation featuring a real-world example.

The Example Scenario

In our example, we have three main players:
1. Lets Transport: A provider of intra-city truck aggregator services.
2. Bajaj Electricals: The company that has availed of Lets Transport’s services.
3. KredX: An invoice discounting platform.

Lets Transport has raised an invoice of Rs. 1.95 crores on Bajaj Electricals for services rendered. The catch is that the payment is due in 91 days. Rather than wait, Lets Transport decides to use the invoice discounting services offered by KredX.

Step-by-Step Invoice Discounting Cycle

1. Raising the Invoice

The cycle begins when Lets Transport raises an invoice on Bajaj Electricals for Rs. 1.95 crores. This invoice has a 91-day credit period, meaning Bajaj Electricals has 91 days to make the payment.

2. Approaching the Invoice Discounting Platform

Unwilling to wait for 91 days to get the payment, Lets Transport approaches KredX to discount the invoice.

3. Assessment and Evaluation

The KredX team then conducts a thorough evaluation of the invoice and assesses the overall credibility of both Lets Transport and Bajaj Electricals. This step is crucial to determine the risk involved in the transaction.

4. Going Live on the Platform

Once all checks are cleared, KredX makes the invoice discounting transaction live on their platform. The platform also displays the promised return on investment, which in this case is 12.10% IRR (Internal Rate of Return).

5. Investment Opportunity

Investors can then review the details and decide whether to invest or not. On the KredX platform, the minimum investment for such deals is Rs. 95,000, and further investments can be made in multiples thereof.

6. Disbursement of Funds

Once investors decide to invest, KredX disburses the funds to Lets Transport. The amount disbursed is the invoice face value (Rs. 1.95 crores) minus the discount rate, which essentially is the cost of this financial service.

7. Payment of Invoice and Investor Profit

After 91 days, when the invoice becomes due, Bajaj Electricals pays the full invoice amount of Rs. 1.95 crores. This amount is used to repay the investors, who receive both their initial investment and their promised return on investment.

8. Repayment Structure

It’s important to note that due to the short tenure of the investment, the repayment, along with the returns, is made in a single bullet payment at the end of the investment period. No monthly or quarterly repayments are involved.

Understanding the invoice discounting cycle is essential for both businesses seeking liquidity and investors looking for shorter-term, high-yield opportunities. In our example featuring Lets Transport, Bajaj Electricals, and KredX, we can see how this financial arrangement can be a win-win for all parties involved—providing immediate cash flow for businesses and profitable investment opportunities for investors.

How Can Investors Invest in Invoice Discounting? 

KredX offers an invoice discounting facility that connects investors with businesses needing funds. Here are the steps that help investors invest in invoice discounting via KredX – 

• First, people must sign up on KredX to invest in invoice discounting.
• Then, they need to submit all the requisite documents to complete the KYC process.
• After the verification process, investors can start to invest in their preferred invoices. 
• They will receive returns directly in their bank accounts on the stipulated date. 

Investors can track their investments easily via the KredX Invest App. We offer a 360-degree credit risk analysis system that helps people invest confidently and efficiently.

Crucial Factors Related to Investing in Invoice Discounting 

Now let us discuss some of the crucial factors that will help investors: 

• First, invoice discounting is more suitable for lump-sum investments instead of small amounts. 
• Opting for the right fintech platform is of crucial importance. Investors need to assess all the details before zeroing in on an invoice discounting platform. Make sure to check the IRR (internal rate of returns), businesses’ credit history, shareholders’ details and financial reports. 
• Investors need to know whether the fintech platform charges any fee. For example, some companies charge businesses and investors to cover the expenses related to deal processing, operations and legal documents. 
• Generally, invoice discounting is more expensive than other financing options. 
• Prepayments and associated facilities are the responsibilities of the fintech service provider. 

Bottom Line

To sum up, invoice discounting is gradually emerging as a popular alternative investment option. It helps investors receive high returns for a considerably short investment period. However, financial advisers recommend checking the credentials and other vital details of the fintech platform before investing. 

Frequently Asked Questions

• How much returns will I receive if I opt for KredX for investing in invoice discounting? 

Investors can get returns of up to 20% per year if they opt for invoice discounting investments with KredX. Moreover, investors receive the benefit of reduced risks.

• Is invoice discounting safe and legal?

Invoice discounting is entirely safe and legal. RBI (Reserve Bank of India) regulates invoice discounting platforms under the Payments and Settlement System (PSS) Act, 2007.