Invoice Financing and Bill Discounting: Unlocking Cash Trapped in Receivables

The Receivables Problem Facing Indian Businesses

One of the most persistent challenges facing Indian businesses, particularly MSMEs, is the extended payment cycle. When customers take 60, 90, or even 180 days to pay invoices, businesses face severe cash flow constraints despite having strong order books and healthy profit margins. This receivables gap forces many businesses to turn down new orders, delay supplier payments, or resort to expensive short-term borrowing.

Invoice financing and bill discounting offer elegant solutions to this problem by converting receivables into immediate cash, allowing businesses to maintain operations and pursue growth without waiting for customer payments.

How Invoice Financing Works

In invoice financing (also called invoice factoring), a business sells its outstanding invoices to a financier (factor) at a discount. The factor advances typically 80-90% of the invoice value immediately, and the remaining amount (minus fees) is paid when the customer settles the invoice. This is an off-balance-sheet financing solution that does not add to the business’s debt burden.

Bill discounting follows a similar principle but typically involves banks rather than specialized factors. The business presents trade bills or invoices to the bank, which purchases them at a discount and credits the net amount to the business’s account. The bank then collects the full amount from the customer on the due date.

TReDS: Government-Backed Solution

The Trade Receivables Discounting System (TReDS) is an electronic platform sanctioned by the Reserve Bank of India that facilitates the financing of trade receivables of MSMEs from corporate buyers. Platforms like RXIL, M1xchange, and Invoicemart operate under TReDS, providing competitive rates through a bidding mechanism among multiple financiers.

TReDS has been particularly beneficial for MSMEs selling to large corporates and government entities, as it leverages the buyer’s creditworthiness to provide financing at lower interest rates than what the MSME could access on its own balance sheet strength.

Choosing the Right Receivables Finance Solution

The choice between invoice factoring, bill discounting, and TReDS depends on factors like the volume and size of invoices, the creditworthiness of customers, the desired level of credit management support, and cost considerations. Professional advisory can help businesses evaluate these options and implement the most suitable receivables finance strategy for their specific needs.