An Invoice Discounting facility refers to a financing institution - or a bank - making an early payment against a trade invoice to a business in exchange for a small fee. This is typically done because, in both domestic and international business-to-business trade, companies typically have a 30, 60 or 90 day credit cycle. Which means that a supplying company or - the seller - gets paid only much later. Having adequate working capital helps businesses expand as they can take on new market opportunities with additional funds on their hands. But conventional working capital products like Overdraft and Cash Credit Facilities provided by Banks require hard collateral and organized financial statements which might be difficult for small businesses. This is where a working capital finance solution like Invoice Discounting comes in. In Invoice Discounting a business can sell goods/services to their customers under an agreed credit period, discount them and receive funds against the invoice. This invoice can be forwarded to a financing company such as Drip Capital which provides a collateral-free invoice discounting facility for exporters using an online platform where you can upload your invoices. Upon receiving the invoice, Drip Capital finances 80% of the invoice value within 24 hours. When the buyer makes his payment to Drip Capital after his credit period is over, it releases the remaining 20% of invoice value after deducting service and interest charges.
There are certain checks that business to undertake before concluding that they need invoice discounting sees. The most important question to ask is whether the absence of working capital will affect the growth momentum of the business. Secondly, the business should have existing banking limits and an appetite for assuming risks. If the answer to either of them is - NO- , the business should consider alternative invoice financing techniques like factoring or bill purchase
The commercial invoice typically mentions the payment terms and the number of days required to make payment after the seller fulfills his/her obligation, since a pre-mature payout by the bank or the financial institution is typically associateed with a discounting feee - meaning the supplier does not get 100% of the outstanding invoice amount, it is termed as invoice discounting. To understand this better, it'll be better to understand how Invoice Discounting Works in the first place.
Here is how a typical invoice discounting flow is completed. A seller issues an invoice that is accepted by the buyer. The invoice mentions a payment term of 60 days, which the buyer accepts. The seller will have to give attractive payment terms to lure the buyer into sealing the deal. Once the payment terms are accepted and the seller delivers the goods, the seller will have to wait 60 days before receiving full payment. Instead of waiting this full period, the seller can simply approach a financial institution, like Drip Capital, and either sell the invoice to them or pledge the invoice as a collateral and draw a loan for a portion of the amount. The latter is called invoice discounting
Buyers & Suppliers
Learn about how we’ve 10xed exporters
Exporter of Plastic products from Maharashtra
We started factoring our export invoices with Drip in FY17-18 and by 18-19 we were getting almost 25% of our invoices financed by them. With the boost in working capital and increased competitiveness in foreign markets because of better terms of sale, our turnover has shown a substantial increase.
Exporter of frozen foods from Andhra Pradesh
As an exporter you may have a great offering, but without easy access to short-term finance, you face challenges in scaling and have to let go of many opportunities. Drip Capital’s easy and efficient export finance solution has helped us ensure there is continuous cash flow in our business. Now we can convert possibilities which we otherwise would have passed on. The result has been a 220% jump in sales in FY19.
Exporter of Red chillies from Andhra Pradesh
When we started our business in 2017, traditional lending institutes could not keep up with the increasing orders from our buyers. With Drip capital fulfilling our working capital requirement, in FY 19 our business reported massive growth as compared to the previous year, over 50% of those export invoices were financed by Drip.
Exporter of Basmati Rice from Punjab
Drip’s factoring service has ensured that our liquidity doesn’t remain tied up in invoices for a long time. Since the start of our collaboration, we have been able to cater to more buyers and our export turnover has increased 4x between FY17-18 and FY18-19.