In recent times, India’s economic landscape has been evolving, with businesses showing a growing preference for alternative financing methods. Among these, digital invoice discounting has emerged as a transformative transaction model, leaving a lasting impact on the national economy.
In this blog, we’ll delve into the workings of invoice discounting, its benefits for the Indian economy, and the role of Credlix, a leading invoice discounting platform in this domain.
Understanding Invoice Discounting
Invoice discounting is a short-term financing solution where businesses sell their accounts receivables to financiers for an immediate liquidity boost. This is particularly beneficial for the Micro, Small, and Medium Enterprises (MSMEs) sector in India, where access to working capital can be challenging.
Credlix, a prominent player in the field, offers end-to-end management, ensuring transparent fund disbursal and fostering sustainable growth in the MSME sector.
Also Read: A Guide to Finding the Best Invoice Factoring Platform
Also Read: How Invoice Discounting Empowers SMEs for Growth
How Does Invoice Discounting Work?
Here’s how Invoice Discounting works:
Invoice Issuance: When a business issues an invoice for a product or service, extended payment terms can create challenges for its cash flow.
Invoice Discounting Process: Through invoice discounting, a financial intermediary steps in to purchase these accounts receivables. This allows the business to receive around 90% of the invoice value within a timeframe of 24 to 72 hours.
Immediate Liquidity: The rapid injection of funds empowers businesses to explore opportunities for expansion or investment plans without being hindered by delayed payments.
Customer Payment: The remaining amount is settled when the customer fulfills the payment obligation at the end of the agreed-upon invoice maturity period.
Confidential Transaction: In contrast to some other methods, this process operates on a confidential basis. The involvement of a third party remains undisclosed, preserving the direct relationship between the business and its customers.
What is Digital Invoice Discounting?
Digital Invoice Discounting is a modern financing solution that facilitates quicker access to funds for businesses. Here’s a straightforward breakdown of how it works:
Invoice Generation: When a business sells a product or service, it issues an invoice to the buyer, specifying the payment terms.
Delayed Payments Challenge: Extended payment terms can strain a business’s cash flow, limiting its immediate financial flexibility.
Digital Transformation: In the realm of Digital Invoice Discounting, a financial intermediary steps in to purchase the business’s accounts receivables, which are essentially the outstanding invoices.
Fast Funding: This process allows the business to receive a significant portion, typically around 90%, of the invoice value promptly—usually within 24 to 72 hours.
Liquidity Boost: The immediate liquidity injection empowers businesses to pursue growth opportunities, undertake expansion plans, or make vital investments without being held back by delayed payments.
Customer Settlement: The remaining amount is settled when the customer pays off the full invoice at the end of the agreed-upon maturity period.
Confidentiality: Notably, Digital Invoice Discounting operates on a confidential basis. This means that the customer remains unaware of the involvement of a third-party financier. The direct business-customer relationship is preserved.
In essence, Digital Invoice Discounting harnesses the power of technology to expedite the flow of funds, providing businesses with the agility and financial freedom to thrive in today’s dynamic market environment.
Also Read: Why Most MSMEs Prefer Invoice Discounting in India
Also Read: What are the Types of Invoice Discounting?
Advantages for the Indian Economy
The fully digitized and collateral-free nature of invoice discounting can revolutionize the functioning of MSMEs in India.
Digital Transformation: The fully digitized nature of invoice discounting heralds a new era for MSMEs in India, streamlining their financial operations.
Collateral-Free Financing: Credlix’s invoice discounting eliminates the need for collateral, making it an accessible option for MSMEs with limited assets.
Contribution to GDP: MSMEs, being a vital contributor to India’s GDP and exports, benefit from Credlix’s flexible regulatory framework, addressing a credit gap of approximately 380 billion dollars.
Equal Funding Opportunities: Credlix levels the playing field by offering a regulatory framework that extends funding eligibility to SMEs, putting them on par with larger companies.
Economic Reshaping: The adaptable nature of Credlix’s invoice discounting has the potential to reshape India’s economic landscape, particularly boosting the competitiveness of the product sector on a global scale.
Risk Mitigation: Credlix’s non-recourse invoice discounting acts as a safety net for small businesses, mitigating risks associated with customer insolvency as the financier assumes responsibility.
Seamless Workflow: The credit protection provided by Credlix ensures the smooth functioning of small businesses, safeguarding them from disruptions caused by non-payment issues.
Market Adaptability: Credlix stands out from traditional lenders with its ability to adapt to market changes, offering financial solutions that align with the dynamic nature of business environments.
Automation Advantages: Leveraging advanced automated methods, Credlix ensures efficiency in financial processes, providing businesses with modern and streamlined solutions.
Global Competitive Edge: By supporting MSMEs and offering innovative financial solutions, Credlix contributes to giving Indian businesses a competitive edge in the global market, fostering growth and sustainability.
Key Features of Credlix’s Invoice Discounting
Credlix’s invoice discounting operates on a cash-flow-based matrix, aligning with India’s largely uncategorized product markets. As an advance rather than a loan, it doesn’t impact a business’s balance sheets, allowing companies to avoid accumulating new debts. The scheme ensures businesses maintain control over sales receivables, manage credit terms, and negotiate deals, preserving their independent operating structure in the economic sector.
A reliable conversion of credit to cash encourages businesses to increase credit sales. Credlix also offers export factoring for companies exploring cross-border open account terms, further expanding their horizons.
Government Support and Regulatory Framework
The government’s changes strengthen rules, providing strong support for businesses and creating a friendly environment for economic growth.
RBI’s Initiative: The Reserve Bank of India (RBI) introduced the Trade Receivable Discounting System (TReDS) to recognize and address the impact of invoice discounting on MSMEs.
Efficient Online Exchange: TReDS serves as an online platform facilitating the swift buying and selling of accounts receivable, offering prompt financial solutions for SMEs.
Government Support: In acknowledgment of the pivotal role played by MSMEs in GDP and job creation, the Indian Government amended the Factoring Regulation Act in 2021.
Expanded Participation: The amendment allows a broader participation of non-banking financial companies (NBFCs), including entities like Credlix, in TReDS platforms, thereby amplifying credit accessibility for small businesses.
Conclusion
In conclusion, Credlix’s invoice discounting is redefining the landscape of alternative funding for small businesses in India. With a comprehensive cash flow solution, Credlix aims to contribute significantly to the growth of the MSME sector. The amended Factoring Regulations Act further opens doors for more NBFCs to engage in invoice purchasing trade with MSMEs, fostering economic development in the country. As businesses leverage the benefits of digital invoice discounting, the Indian economy is poised for positive transformation in the near future.
Also Read: 5 Reasons To Choose Invoice Factoring Over Bank Loans
