As financial knowledge grows in India, investors seek more products to diversify their portfolios and gain exceptional returns. Out of the various options, invoice discounting has become a popular product among HNIs who invest money for the short term and try to earn an IRR of 10-15% in this period. In this blog, let us try to dive deep into this investment opportunity and how one can earn good returns and escape the equity market's volatility.

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India is an economically growing country. As we head towards a 5 trillion dollar economy, some numbers remain in our favor. The number of Demat accounts surged to 12.97 crores, reflecting a 26% year-on-year increase. According to Mint, over 70% of the active accounts had been activated post 2020. The number of DIIs in the Indian market has constantly been increasing. With a record 3 lakh crore in 2021, As of December 19, 2023, DIIs have pumped a net ₹1.28 lakh crore (US$16.4 billion) into the Indian stock market in 2023. 

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But the first learning of investing is, "Never put all your eggs in one basket." As the growing exposure to equities and gold rises, multiple alternative investment tools have leaped because of this investment sphere. One popular tool that has participated in this race is Invoice Discounting. Let us understand this in-depth via this article. 

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What is Invoice Discounting?

Let's think from the lens of a business person to understand the art of Invoice Discounting. After completing a job, your company raises an invoice of 100$ to another company. Generally, businesses take a credit period of 45-60 days to repay this bill. During this credit period, the accounts receivable is a short-term cashflow crunch you will face. To solve this immediate cash requirement, you may opt for invoice discounting, where you can take a short-term loan against these accounts receivable. 

Definition: Invoice Discounting is a financial tool allowing businesses to take short-term debt against an invoice (accounts receivable) to continue their daily business activities. 

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How do retail investors join this sphere?

For retail investors, multiple platforms help them pool their money against one or multiple invoices for a short period. Let us understand this via the model used by Tap Invest. So, when a company lists itself on Tap's platform, retail investors can invest in that company, with a minimum investment as low as 5000. Tap pools this money, gives it to the company, and repays the investor after the tenure is completed, with accumulated interest ranging from 12-14%. 

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The liquidity-min investment sphere

Invoice Discounting is a short-tenure investment. Invoices can date between 30 and 180 days based on the invoice tenure and IRR provided. Therefore, one can choose tenure as per their allocation strategy. But when it comes to investment amount, one generally needs to invest a minimum of 50,000 to tap into this opportunity. However, platforms like Tap make starting with invoice discounting easier by tuning the minimum investment to 5000. This reduces exposure to a single company or invoice and makes it easier to invest in this opportunity to begin with. 

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Risk alert

Investment in unregulated opportunities comes with a lot of risks. Multiple things can go wrong with such investments. Let's break them into more straightforward points. 

• Cashflow crunch: The company may face short-term cashflow crunch and delay payments. This could impact one's return. 
• Bad economy and financials: During economic turmoil or failure to do business, the company may default, and one can lose their invested amount and the interest they were supposed to receive. 
• Quality Risk: If the company sells inferior quality goods, the creditor may refuse to clear the invoice, creating havoc and hampering one's investment.

TReDS and Regulations

Financial watchdogs help ensure that the number of frauds is limited and that investors' money is safe. RBI and Sebi have confirmed that they limited financial frauds and that there is reduced risk exposed to retail investors. Although an unregulated space, Invoice Discounting has a regulated entity called TReDS. TReDS is an electronic platform for facilitating the financing/discounting of Micro, Small, and Medium Enterprises (MSMEs) trade receivables through multiple financiers. These receivables can be due from corporations and other buyers, including Government Departments and Public Sector Undertakings (PSUs). Here, only MSMEs can participate as sellers and just Banks. NBFC - Factors and other financial institutions are permitted by the Reserve Bank of India (RBI) to join as financiers in TReDS. 

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Conclusion:

In the current scenario, when markets are highly volatile, one must choose their investment devices carefully. Although a beautiful investment vehicle, invoice Discounting comes with its risks. One must understand the instrument carefully before investing.