Invoice Discounting Investment in India: Returns, Risks, Benefits & How to Start

Invoice discounting is a common practice among enterprises seeking to cash in on payment dues to fund their operations and enhance financial liquidity. However, turning discounted invoices into an investable asset class is indeed innovative. Currently, financial technology has made it possible to turn discounted invoices into easily transactable and lucrative investment opportunities.  

This article discusses everything that you must learn about the return, risks and benefits of investing in discounted invoices. 

What is Invoice Discounting investment?

Invoice discounting investments in India are RBI-regulated and platform-based financial instruments. They connect people with investable cash with enterprises willing to encash their outstanding or unpaid invoices at a discounted rate. 

Essentially, such instruments allow businesses to receive upfront cash for their credit sales before the end of credit periods (usually 30, 60 or 90 days). It involves determining a present value (discounting) of the future payment that an invoice entails. The return for investors is the rate at which an invoice is discounted. 

How does invoice discounting investment work? 

Invoice discounting is a common practice among businesses. Banks and financial institutions offering business banking services conventionally meet such demands as part of working capital financing. Many individual lenders also purchase discounted invoices. However, modern fintech platform-based invoice discounting has standardised investment opportunities in such instruments. 

Invoice discounting investment in India primarily works in the following steps. 

1. Company raises invoices - Any business selling goods or services on credit issues an invoice to its customers with either 30, 60, or 90 days credit period. A customer accepts invoices and gets deliveries on condition of paying the dues, at the latest, by the end of the credit period. 
2. Working capital requirement - The 'seller' company raising the invoice can wait for the entire credit period to receive payments. However, the company may need cash sooner to keep its business operations running. It is part of working capital management. 
3. Selling invoices outstanding to investors: Instead of waiting through the credit period, the company decides to sell outstanding invoices to interested investors at a discount. This happens through fintech online platforms specialised in invoice discounting. 
4. Purchasing the invoice: The platform intermediates with investors and arranges payments at a discounted rate for the invoice. 
5. Receiving payment from the original customer - When the credit period ends, the 'customer' company makes the payment directly to the 'seller' company or to the investors. If the payment is made to the seller company, it then repays investors. 
6. Return on discounted invoice - The difference between the discounted price and the full invoice amount is the invoice discounting investment returns. 

Returns from invoice discounting investment

The return on the amount invested in invoice discounting is the difference between an invoice's total outstanding value and its discounted value. For example, an invoice worth Rs.1,00,000 for a 30-day credit period is sold at a discounted price of Rs.95,000. 

Then, the return on the amount invested (i.e., Rs.95,000) will be (Rs.1,00,000 - Rs.95,000) or Rs.5,000. The rate of return will be (Rs.5,000/Rs.95,000) or 5.26% in 30 days. 

Invoice discounting investment risks

Invoice discounting investments are based on regulated financial instruments. However, such investments are not free of certain risks. Some of the key considerations and risks associated with such investments are as follows- 

• Credit risk - 'Customer' companies may default and fail to make payments on the original invoice. 
• Platform risk - Fintech platforms curating or accumulating discounted invoices may cease to exist due to external reasons. This causes a loss of intermediation. 
• Liquidity risk—Investors have to wait through the credit period to realise a return on their investments. Money is locked in until the credit period ends, which may cause liquidity issues for investors. Temporary delays or defaults by 'customer' companies may prolong this period and require legal expenses.  
• Regulatory risk - The RBI's Trade Receivables Discounting System (TReDS)  regulates invoice discounting mechanisms. However, practical application of this regulatory framework is still emerging in the country.  

Minimum investment & eligibility

The eligibility for companies to avail of invoice discounting facilities are as follows-

• A company must offer credit terms to its customers. 
• Invoices must mention credit terms clearly and a fixed date for payment of outstanding dues. 
• A sales contract must be based on a valid purchase order from the customer. 
• Sales contracts must be legally enforceable and endorsed by the seller and customer, as well. 
• The 'seller' company must fulfil its delivery obligations. 
• The 'customer' company must accept the invoice. 

The eligibility for investors is as follows-

• Indian resident 
• PAN 
• Bank account 
• KYC compliance 
• Minimum age of 18 years 

The minimum investments and tenures of investing in discounted invoices are as follows;

• Standard tenure - A minimum of 30 days to a maximum of 120 days 
• Return - Varies with prevailing benchmark interest rates.  
• Minimum size of investment - The majority of invoice discounting platforms maintain a minimum investment of Rs.1,00,000. However, some platforms also offer invoice discounting investment products of lower ticket sizes. 

Example of invoice discounting investment

Scenario: 

• Seller - ABC Pvt Ltd
• Customer - XYZ Pvt Ltd 
• Invoice value - Rs.1,00,000 
• Credit period - 90 days 
• Invoice discounting platform - EFG Ltd  

ABC needed cash immediately and decided to sell off the invoice to investors on EFG's platform. The prevailing discounting rate is, e.g., 3% for 90 days of credit. 

• ABC sold off the invoice in exchange for 97% of the invoice value, i.e., Rs.97,000. 
• XYZ paid Rs.1,00,000 at the end of the credit period (i.e., 90 days), and the money was transferred to the respective investor through EFG's platform.  
• The net return for the investor is (Rs.1,00,000 - ₹97,000) or Rs.3,000 for an investment tenure of 90 days. The annualised return on the investment will be around 12%.  

Benefits of invoice discounting investment

The unique benefits of investing in invoice discounting instruments are;

• Short-term investment horizon (typically ranges between 30 to 90 days) 
• Regulated financial instrument (under RBI's TReDS) 
• Predictable return profile (pre-specified credit period and prevailing benchmark rate in the banking system)
• Portfolio diversification (beyond fixed-income and equity instruments)

How to start investing in invoice discounting?

1. Check multiple investment discounting platforms before choosing one. Understand transaction costs and reputations. 
2. Identify invoices suitable for your risk appetite. Highly creditworthy invoices offer lower returns. 
3. Go through and review the terms and conditions of the invoice thoroughly. 
4. Invest in the invoice/invoices through the platform.  
5. Monitor the investment throughout the credit period until the payment is received. 
6. Reinvest the received sum if you find suitable invoices.