A form of short-term borrowing where a business uses its unpaid invoices as collateral to receive immediate cash from a financier, while retaining control of collections.
Invoice Discounting (also called confidential invoice discounting) allows businesses to borrow against their outstanding invoices without notifying customers. The financier (bank, NBFC, or fintech platform) advances 70–90% of the invoice value immediately. The business continues to collect payments from customers as normal. Once collected, the business repays the advance plus fees. Unlike factoring, the customer relationship remains undisturbed — the customer pays the business directly, unaware of the financing arrangement. In India, platforms like TReDS (Trade Receivables Discounting System) — with exchanges M1xchange, RXIL, and Invoicemart — facilitate invoice discounting for MSMEs, with mandatory participation by large buyers and government departments.
Invoice of ₹10,00,000 due in 45 days. Platform advances 85% = ₹8,50,000. Interest: 14% p.a. for 45 days = ₹14,671. Processing fee: 0.5% = ₹5,000. Business receives ₹8,30,329 immediately. After 45 days, customer pays ₹10,00,000 to business, which repays ₹8,69,671 to the platform and keeps ₹1,30,329.
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TReDS (Trade Receivables Discounting System) is an RBI-regulated electronic platform where MSMEs can discount their invoices raised on large buyers. Large companies (with turnover > ₹500 crore) are mandated to register on TReDS. Benefits: competitive rates (multiple financiers bid), quick disbursement (24–48 hours), no collateral needed, and it's backed by RBI regulation.
Invoice discounting: no fixed repayment, grows with sales, linked to specific invoices, no collateral beyond invoices, funds available in 24–48 hours. Bank loan: fixed EMI, fixed amount regardless of sales, requires collateral, takes weeks to process. Invoice discounting is more flexible but typically more expensive per rupee borrowed.
A short-term financing method where a business sells its trade receivable (bill of exchange) to a bank at a discount to receive immediate cash before the bill's due date.
A financial arrangement where a business sells its entire accounts receivable to a third party (factor) at a discount to obtain immediate cash.
Money owed to a business by its customers for goods or services delivered but not yet paid for.
The difference between a company's current assets and current liabilities, representing the short-term liquidity available for day-to-day operations.
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