Of late, more entrepreneurs are recognising the benefits of opting for invoice discounting to boost operating cash flow. And why not? It allows business owners to access cash timely without adding to their existing liabilities.
Recently, the automotive industry has taken an interest in the concept of invoice discounting and is rapidly adopting it to access funds. In addition, trends show the industry is looking at accounts receivable financing as an effective means to boost a company’s and its suppliers’ cash flow.
That said, let us uncover more details about invoice discounting and its contribution to auto companies.
Invoice Discounting – In A Brief
Invoice discounting is financing that allows sellers to access funds tied up in their unpaid invoices and helps settle suppliers’ claims and other cash flow requirements with ease. The said arrangement helps bridge the working capital gap and keep daily operations afloat and smooth.
In such a financing setup, an entrepreneur can leverage their unpaid invoices to raise funds tied up in them. Usually, invoices come with a maturity period of up to 90 days. Upon completing the same, the client settles the due, and the seller pays the service charges and additional fees along with the borrowed sum to the discounting service provider.
The best thing about this financing method is that businesses do not need to provide any collateral to raise funds. Also, they retain the ownership of their accounts receivables throughout without impacting their balance sheet or existing debt burden.
It must be noted that in invoice discounting, the ultimate task of payment collection rests with the seller. This means entrepreneurs have to chase after their customers on the maturity of invoices for payment. In turn, it works out in their favour as it helps maintain confidentiality regarding the arrangement and involvement of a third-party financier.
Invoice Discounting And The Automotive Industry
To help MSMEs tackle the liquidity crisis, the Reserve Bank of India had set up a trade receivable discounting system in 2017, popularly known as TReDS. Currently, M1Xchange is touted as among the top 3 TReDS players in India. The platform witnessed over 10% volume from India’s automotive sector and facilitates transactions worth more than Rs. 1000 crore in a month.
Per reports, the volume of transactions on M1Xchange soared during the nationwide lockdown. Besides this platform, Invoicemart and RXIL are the two other leading TReDS platforms. These platforms serve as a marketplace where buyers with authentic invoices reach out to financiers to raise working capital.
Besides these, several other fintech companies, such as KredX, extend quality invoice discounting facilities. The said platform allows access to cash within 24-72 working hours* and against simple terms. Thus, auto companies and other enterprises can reach out to such fintech portals and leverage their high-end invoices for better supply chain management.
Suppliers of automotive companies are of the opinion that invoice discounting can shorten the working capital cycle. Since automotive space and allied sectors are extremely competitive, having access to funds through discounting channels can help churn out money faster. This will definitely allow entrepreneurs to boost the business and its operating efficiency.
The associated perks of invoice discounting help small businesses address working capital issues without any additional burden. Accordingly, businesses are able to keep their daily operations smooth and in a robust position to cater to the needs of their customers promptly. These pointers have collectively helped auto companies warm up to invoice discounting and accelerated its implementation in their regime.