Document

What is Invoice Trading?

By Annapoorna

|

Updated on: Sep 8th, 2022

|

3 min read

social iconssocial iconssocial iconssocial icons

Businesses have access to many funds to finance their working capital requirements. Over the years, many invoice financing methods have emerged to solve cash flow problems. Invoice trading is one of the latest methods that is helping businesses.

What is invoice trading?

Invoice trading refers to a process in which businesses sell their outstanding invoices over a platform to investors in return for cash. Businesses sell unpaid invoices to borrow short-term funds, which will be repaid when the debtor settles the invoice. This enables businesses to utilise funds locked in the form of receivables. Invoice trading uses the principles of peer-to-peer finance, where persons in need of finance can directly obtain them from lenders via a platform.

Who can get into the invoice trading facility?

Any business which requires finances can make use of the invoice trading facility. A business needs to apply on an invoice trading platform, where it can be accepted. Invoice trading is open to businesses of all sizes but is usually preferred by small and medium-sized businesses in need of funds. Banks and financial institutions are not involved in the lending process, unlike traditional financing methods. Trustworthy and verified investors are lenders businesses interact with over a platform. These investors usually include institutional investors, wealthy individuals, asset managers, and hedge funds.

Advantages of invoice trading

  • Quick and easy access to finances: Businesses get quick access to funds to finance their working capital needs. Businesses have easy access to funds due to them being online. As long as a business doesn’t have serious financial issues, one can easily qualify for the facility. 
  • Convenient source: Unlike traditional sources of finances where one has to follow cumbersome procedures to obtain finances, invoice trading is relatively convenient. 
  • Wide base: The online platform setup provides access to a large base of lenders to finance invoices. This also makes it easier to finance foreign invoices. 
  • Flexibility: Businesses can trade invoices when necessary and choose which invoices to trade and which debtors to involve.
  • Good return for investors: Invoice trading helps investors diversify financing and achieve good returns on their investments.

Disadvantages of invoice trading

  • High cost: To use invoice trading services, one has to bear various charges, including application fees, credit check fees, processing fees, etc., which may or may not be a big percentage of the invoice value.
  • Only commercial invoices: Businesses can only trade invoices on the invoice trading platform. Hence, invoice trading is of little use if the customers are the general public.
  • Credit risk: Investors usually issue finances against creditworthy business’ invoices. Hence, they prefer to finance invoices due from larger businesses than smaller businesses.

How does invoice trading work?

The invoice trading process consists of 3 parties:

  • Businesses willing to sell invoices in return for finances
  • Investor(s) who offer to buy the invoices
  • Invoice trading platform where businesses and investors interact
Invoice trading

Invoice trading is a fast-growing solution that will help businesses raise short-term funds in a secure method. The peer-to-peer interaction between parties via online platforms ensures easy and quick sourcing of finances compared to other traditional sources of finance. 

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

Index

Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company PolicyTerms of use

ISO

ISO 27001

Data Center

SSL

SSL Certified Site

128-bit encryption