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How Does Invoice Discounting help MSMEs?

By Annapoorna

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Updated on: Apr 21st, 2022

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3 min read

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Unpaid invoices often prove to hinder smaller businesses since they have limited sources of working capital. Businesses can generate money for their working capital needs via invoice discounting. This can be done by requesting early payment at a discount from their buyer companies or keeping their invoices as collateral with third-party financiers against the credit available.

Benefits of invoice discounting to MSMEs

  • Better cash flow

Unpaid invoices are never a promising sign of a thriving business. Delayed payments adversely affect the cash flow, often leading to a cash crunch. Invoice discounting speeds up the conversion of receivables into liquid cash, especially with the seller offering the buyer incentives for early settlement. This enables the businesses to carry on their operations, as usual, working towards better levels of efficiency.

  • Convenient payment options and transparency

In cases where the seller offers the buyers a discount on the total amount if the payment is made early, it is a direct payment with no need for repayments. Even in cases of third-party funding of invoices, the repayment schedule is carefully structured based on the size of the business, ensuring that the cycles of payment are spaced well between intervals at the borrower’s convenience. The financing system is designed to cover about 90% of the total value of the outstanding bills. 

  • Reduction in the risks associated with bad debts

Bad debts often have the power to go as far as to sink a healthy business. Invoice factoring reduces the risk associated with bad debts on account of unpaid invoices, since the banks also evaluate the buyer’s creditworthiness before offering the program. 

  • Investments can be made in growth levers like technology and infrastructure

Invoice discounting tends to free up funds that can be put to better use. Investing in infrastructure and technology is always a good idea since it happens to be one of the crucial decisions that help the business have a competitive edge in a dynamic environment. This kind of investment is relatively high, and since invoice discounting reduces the need for credit for managing working capital  – it makes it easier to invest in these areas.

  • Lower borrowing rates

Invoice factoring is made available to buyers based on their creditworthiness and ability to pay back the loan in timely instalments, as per the repayment schedule.  Even though the advances are made to the seller, it is the responsibility of the buyer to settle the dues. Since they can verify the buyer’s creditworthiness before advancing the credit, the borrowing interest rates are relatively lesser since the risk involved is lesser.

  • Collateral-free credit facility

The only underlying asset against which the credit is given is the unpaid invoices. Therefore, it can be said that invoice discounting is a collateral-free credit facility. As a result of this, businesses that have a relatively smaller turnover can also avail the discounting invoice facility with ease. This makes the process smooth and flexible compared to other available credit facilities.

About the Author

I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more

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