What is Invoice Discounting?
As we all know that small businesses are the backbone of the economy. So, there are thousands of small businesses in India and they all require cash to run their operations. And it is a very difficult job for them to maintain their cash flow.
Let’s learn with an example so, there is a small vendor “Sharma leather” as the name suggests it manufactures leather and supply that leather to shoe manufacturers. One day PUMA approaches Sharma leather and Puma said that they need raw leather to make 1 lakh shoes so, that Puma can sell their products to customers. Sharma leather is very happy as a very big client has approached him with a big order. But here there is a problem. Puma said that we will take raw leather from them today and will pay them back after 90 days. Puma needs a credit period of 90 days. At last Sharma, leather agreed to all the terms and conditions because for Sharma leather this is a big order and they have to wait for 90 days for the final payment from puma. But Sharma leather has to pay salaries, paying the electricity bill and they need capital to run their factory but they will receive the payment after 90 days.
What are the options left with Sharma leather that they can take a loan from a bank but banks also have some criteria but these small companies can’t fulfill the criteria so, they can’t take a loan from the bank and the other option is to take a loan from an individual like me and Mr. Sharma will show me the invoice of 10 lakhs which they will get from puma after 90 days. They demanded money from me and were ready to give me that Invoice for 9 lakhs. So, after 90 days I will get 10 lakh and thus I will make a profit of 1 lakh. And this is known as “INVOICE DISCOUNTING”.
Now, they raised capital through their invoice that’s the reason behind this name. This is one of the ways MSMEs raise money in India. Many Investors in the market are willing to lend money to the vendors like Mr. Sharma and other small-scale enterprises. But how these parties will reach each other? There are many online portals through which they can reach each other. One of the portals is “TRADECRED” where all the vendors can sell their Invoices and interested investors can invest their money in it.
This investment is not linked to the stock market rather you are investing your money in an Invoice of a firm and you can expect a return of 11%-12% and this is a small-term investment where you can make a profit within 3 months. As many people in India invest their money in PPF (Public provident fund) and expect a return of 8% in 15 years which is a very long period and in Invoice discounting you can earn good profit within 3 months. Investment in Invoice Discounting is less risky as compared to the risk in the stock market.
Similar Websites like “TRADECRED” are: