This is a way of raising short-term funds or getting the liquidity required when your working capital is stuck in credit period availed by your buyer. Invoice discounting is a specific term for trade receivable discounting. Invoice discounting means getting funds against invoices you raised against your buyer. like receivable finance with some difference from receivable finance –

• Invoice discounting needs buyer authorized post purchase invoices, whereas in receivable financing we can raise fund basis purchase orders, bills and invoices, sales contracts etc.
• Invoice discounting is faster way of getting working capital
• Your firm’s credit score should be good, whereas in case of receivable finance your buyers creditworthiness is more important
• Here discounting firm takes charge/control on the invoices raised, unlike in receivable finance where no such charge is created

Let us discuss the example of our miller:

Considering a sale of 10MT flour by miller to the buyer on a credit period of 30 days, to liquidate those invoices miller submitted invoices to a financier, financier in return paid the miller around 80-90% of the invoice amount (Invoice Value–Margins Kept) and took hold of invoices. Now buyer will be paying the financier in his stipulated credit period.

There are many trade receivable discounting platforms like Invoicemart, M1Xchange, RXiL and KredX etc. We will discuss the process of invoice discounting in Invoicemart in our next article.