MSMEs are emerging as the most vital sector of the Indian economy. While the government is providing a myriad of options for them, their chronic plight lies in the late payment of invoices. Such deferments create issues in the management of working capital.
Invoice clearance typically takes 60-90 days. During this period, the working capital of the MSMEs gets locked. Many resort to banks for credit without realising that the invoice is also an instrument to generate cash.
The invoice remains an underutilised financial instrument. Various tech-based startups have come forward to solve the issue of late payments. While some provide working capital in advance, others have come up with invoice discounting processes.
What Is Invoice Discounting?
Invoice discounting is a seamless process that provides working capital to the MSMEs based on its assets. Suppliers get the cash in advance and need not wait for the buyer to settle the payment.
Let us see how tech-based invoice discounting startups help the MSMEs.
Tech platforms act a third party between the corporate buyers and their network of suppliers across products and services to get details of booked invoices. When any invoice detail flows into the platform, the rate of discount is calculated and shown to the supplier. These invoice discounting platforms also take care of the accounting entries discounted through the platform to ensure prompt payments to the suppliers.
Example of Invoice Discounting Process
| Day 1 | The SME raises an invoice on a blue-chip company. |
| Day 3 | The SME lists the invoice on the invoice discounting exchange. |
| Day 5 | The corporate buyer chooses to buy the invoice at a discount of 10-20% (mutually agreed between the SME and the supplier) from the supplier SME. |
| Day 10 | The supplier SME gets the amount at a discounted rate. |
| Day 50 | The corporate buyer gets the invoice amount from the blue-chip company. |
Importance of Invoice Discounting
Since the MSME suppliers get the amount within 4-5 days of raising the invoice, their working capital remains unaffected. They can use the funds for further business expansion or any routine requirements. Their problem of locking up of the working capital is solved.
How Technology Has Made Invoice Discounting a Boon For MSMEs
Tech-driven processes make it easier for SMEs to receive financing at various stages of the entire procurement-to-pay cycle (pre- or post-shipment). At the same time, it also provides complete transparency to the auditors about the progress. The connected systems ensure that companies have access to real-time dashboards. So, they are better equipped to generate reports and take critical business decisions.
The Government of India has been proactive in the past few years in using fintech platforms to drive the economic growth of MSMEs. These tech-based firms employ machine learning and blockchain to make the processes transparent, safe and secure for all the parties. Blockchain technology has been the best solution for invoice discounting, as there are multiple stakeholders involved. Besides, blockchain technology-based ledgers do not allow anyone to tamper with the records. Automated payments via smart contracts make the process safe and smooth to operate.
The deployment of technology eliminates the need for manual verification of trade documents. This also saves time. Moreover, these technology platforms help in the generation of dynamic rates depending on the macro and micro forces affecting the supply chain. This makes the market clearance rate readily available to the stakeholders.
Thus, tech-based invoice discounting systems are a boon for SMEs. Better awareness about the safety, security and benefits of these tech-based invoice discounting methods will lead to more adoption by various players.