MSMEs Leveraging Bill Discounting Platforms

Updated on :  

08 min read.

The most common problem that MSMEs encounter is liquidity, often resulting from delayed payments from customers. Bill discounting platforms have emerged as a saviour to combat these liquidity problems.

Meaning of bill discounting

Invoice discounting is an alternative form of credit for businesses wherein vendors of a corporate buyer offer discounts to the aforementioned in exchange for payment at a date earlier than the maturity date. MSMEs can submit the bills of the customers who intend to settle their bills within 30 to 120 days. Once the seller uploads the invoices onto the platform, the financier applies the discounting rate while the buyer approves the uploaded invoices. At settlement, the seller pays a percentage as the discounting fee to the financier, the financier then transfers the invoice amount to the seller’s account.

Benefits of bill discounting for MSMEs in India

  • Better financial health

The actual number of MSMEs that receive formal credit is below 20% overall. Banks often have a lengthy approval process for the disbursement of loans which stretches out to weeks and, in some cases, even months. This long process could have an adverse bearing on MSMEs and their financial health. The rise of fintech companies is a boon to these MSMEs since the application process to avail financing is relatively simpler and shorter than the banking processes.

  • Improved levels of working capital

By providing the option of credit sales to the customers, the bill discounting platforms encourage the customers to extend their spending limit further, thus resulting in larger sales for businesses. Customers tend to defer payments, thus affecting the working capital levels of these MSMEs. With the introduction of bill discounting platforms, MSMEs can easily convert their account receivables into liquid cash. This helps ease the pressure on the working capital cycle of the business.

  • Collateral-free financing

Traditional sources of financing require businesses to provide collateral against loans to be availed by them. However, with bill discounting, the need to provide collateral in assets is eliminated by offering up the unpaid invoices in exchange for funding.

  • Element of control

Bill discounting allows the business owner to exercise control over the sales ledger. They are free to manage the terms of credit, collect dues or negotiate deals, as the case may be.

  • Confidentiality

The fact that the business opted for bill discounting doesn’t have to be public knowledge. In other words, businesses are free to leverage their unpaid invoices for bill discounting in exchange for financing without informing the customers. This ensures that the decision of bill discounting does not compromise the company’s image, its reputation, or its business relations.

  • Improved business performance

Since bill discounting enables the business to convert its account receivables into liquid cash instantly, the business owners needn’t wait for the customers to make the payment. This helps the smooth flow of business operations since the working capital levels of the business improve as a result of the quick conversion of receivables to cash.

How does it help with the cash flow?

Traditional sources of financing, especially banks, require the MSMEs to go through a detailed verification process, the burden of offering up collateral to match the loan amount, and laborious paperwork. This turns out detrimental to the business when we factor in the time and cost to get all the paperwork organised.

Bill discounting provides a quick solution to the problems above in collateral-free financing, little-to-no documentation, and a basic process to avail funds. The bill discounting process is completed at the click of a button compared to the weeks/months that traditional sources of financing entail. The conversion of account receivables into liquid cash enables the ready use of funds for the business to utilise in its day to day operations.

Factors to keep in mind while choosing the right bill discounting platform

  • Eligibility to avail bill discounting (turnover and credit rating).
  • Requirements concerning collaterals.
  • Time involved in completing the bill discounting process.
  • Risk coverage terms.
  • Platform’s compatibility with the organisation and its resources.
Hide →