The middle class is vulnerable to the financial crisis, get an answer to which is the best investment plan in India for middle class to ensure safety & wealth.
Whenever the stock market crashes, a debate about a safe and secure investing instrument starts.
One such short-term instrument is invoice discounting which has been in a lot of discussions in the recent time.
So In this article, I am going to discuss
What is invoice discounting?
How to do invoice discounting?
How much interest can you earn?
What are the risk and rewards?
How can retail investors earn through invoice discounting?
- What is Invoice Discounting?
- Invoice Discounting For Retail Investors – Risk & Rewards
- TradeCred Invoice Discounting Investment Platform
- Frequently Asked Questions
What is Invoice Discounting?
Small companies often go through a cash crunch, so they have to take loans against their invoice through invoice discounting to run their business.
An invoice is basically a bill against which payment is made by a person for whom you had done some service.
So there are two sides involved
- Who has generated the invoice and
- Who is going to make the payment against the invoice
Let’s try to understand invoice discounting through a simple example
Say there is a small delivery box-making company XYZ and it gets a contract of 50 Lakhs from Flipkart to create delivery boxes.
So here the 25 Lakhs is the invoice XYZ will generate for Flipkart to pay on the completion of the order.
Big companies like Flipkart do not make payments upfront but after some days of order completion which is called a credit period, let’s say here it’s 90 days.
Now the problem is that XYZ needs working capital let’s say 30 Lakhs upfront for raw material, labor and etc.
XYZ is not a huge company with a lot of credit history to take a loan from the bank for such an amount.
Invoice discounting comes to the rescue in such a scenario.
Loan providers in invoice discounting could be HNIs(High Networth Individuals), NRIs, and Institutional investors.
These investors solve the problem of capital for some return on the investment which is between 10-13%.
Invoice Discounting For Retail Investors – Risk & Rewards
Invoice discounting was considered to be an investment option only for large investors and HNIs.
However, in the last 4-5 years this scenario has changed, and now even retail investors like you and I can also take advantage of invoice discounting.
Advantages of Invoice Discounting
Short Term Investment
Invoice discounting can be a good tool to generate some returns in a short period of 6-9 months if you do not want to put your money into long-term risky investments.
Invoice discounting is not volatile as the stock market and offers fixed returns which are usually better than fixed deposits.
It becomes a good investment option between stock & fixed deposits.
Invoice discounting is also a good way to diversify your portfolio if you have too much exposure to risky assets like stocks.
Disadvantages of Invoice Discounting
There is a risk if the company for which the invoice is raised is not able to make the payment on an invoice.
Therefore it becomes very important to invest only in invoices of companies that are big & reputed enough so that there least credit risk.
Eg: Amazon, Flipkart, Coca-Cola, etc.
Dispute risk could be when the company(XYZ) that has raised the invoice has delivered bad quality products and now the company(eg. Amazon) is not ready to pay the invoice.
So the company raising the invoice should also be good quality and reputed.
This risk occurs when one or both of the companies are not in the state of either delivering the product or paying the invoice.
There could be several extreme reasons why either of the company goes bankrupt.
TradeCred Invoice Discounting Investment Platform
After understanding what is invoice discounting now the question you would have is where to find these invoices.
There are various online platforms that provide the facility to invest in invoice discounting from anywhere and everywhere.
You can go through various invoices generated in the name of big companies like Amazon, Flipkart, ITC, etc.
One such platform is TradeCred which is one of the best invoice discounting platforms in India for investors.
What TradeCred Invoice Discounting platform does to reduce the risk of invoices on its platform.
- Invoices listed on TradeCred are verified by Buyer(eg. Amazon), which means if the invoice is for Amazon to pay then TradeCred gets it verified by Amazon.
- TradeCred maintains an Escrow Account when Buyer(eg. Amazon) makes a payment it does not go directly to the Seller(XYZ) but to this Escrow Account and from there to the investor of the invoice after the deal duration.
- If the Buyer(eg. Amazon) does not pay the invoice due to some dispute, then the Seller(XYZ) needs to pay the invoice, also called a Dual Recourse Mechanism.
Tradecred minimum investment
Minimum investment in Tradecred can start from Rs. 50,000 also. However, you can also find deals whose ticket size is more than the minimum investment amount.
Sometimes Tradecred also comes up with promotional offers where you can start investing with as low as Rs. 10,000 but that is occasional.
You can find deals on Tradecred where returns could range between 11% – 13%.
I hope you now know what is invoice discounting in detail & what are its PROS/ CONS.
You can open a Tradecred account by clicking below.
Let me know if you have any queries or feedback by commenting below.
Frequently Asked Questions
Is invoice discounting good investment?
It depends on your goal, if you are looking for a fixed return in a short duration without any volatility then it’s a good option.
Always analyze the risk-reward before making any investment.
Is invoice discounting a good idea in India?
Invoice discounting is a great opportunity for short-term investment. However, you should always be cognizant of the credit risk of the companies whose invoices you are investing in.
How safe is invoice discounting?
The safety of your invoice completely depends on the credit worthiness of the companies involved.
It’s always recommended to invest in the invoices of the branded & credible companies.
Platforms like Tradecred also do some due diligence in ensuring the safety of the invoices.
How reliable is Tradecred?
Tradecred has maintained a good record with 0 defaults in the last 4 years including the COVID-19 period.
It is backed by great management & founders.
Tradecred lists invoices of credible brands like Amazon, Tata, ITC, etc to ensure complete safety.
Who regulates invoice discounting in India?
There are no specific regulators as of now for invoice discounting however platforms offering the investment type take certain measures by themselves to ensure safety.
A few measures taken are legal agreement contracts and Adhaar verification.
Is invoice discounting a loan?
Yes, invoice discounting can be termed as short-term loans.
What is the minimum amount to invest in Tradecred?
You can find invoices on Tradecred where you can start investing with Rs. 50,000.
Is invoice discounting taxable?
Yes, the earning from invoice discounting is taxable as per the investor’s slab.
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