Investing in Invoice Discounting: Use Cases, Benefits & How To Start

2 commonly asked questions around fixed income instruments like Bonds, SDI & Invoice Discounting are

What is a good use case of these instruments
What is a good way to start investing in these (for beginners)

Now, these questions are highly subjective and a lot of things depend on investor goals, risk appetite and so on. But I recently came across a personal situation, which I thought offers great opportunity to invest in these instruments. In fact, I am investing almost 20lacs in Invoice Discounting, in a very short time frame for this situation. Let me explain in a but more detail.

What is Invoice Discounting?

Invoice discounting is a financial arrangement where businesses sell their unpaid invoices (amounts customers owe them) to a lender (the investor) at a discount. This gives the business immediate cash flow instead of waiting for customers to pay.

Example: Assume a company is owed ₹1,00,000 by a customer (client) who will pay in 60 days. The company can sell this invoice to an investor (like you & me) for ₹95,000 today. When the client pays the full amount later, the investor earns the difference as their return.

For investors, this is a a way to earn fixed returns over a short period. For Business this is a easiest (or cheapest) way to maintain working capital cashflows.

What Platforms Offer Invoice Discounting

With rapid advancement of fintech, a lot of platforms are offering invoice discounting to retail investors. Among these, the most popular ones are

Altgraaf: (4500cr invested till now) This is my preferred platform & I have invested over 22lac here. (Disclaimer: I also work as a partner with them, i.e., I manage accounts of multiple people from friends & friends, & get a commission for every investor who invests via me).
Tap Invest: (400cr invested till now) New Player in the market. Great team. Good deals. Their return rates are usually better. But since they are new, I am being cautious with them.
Tyke: They offer multiple products, invoice discounting being one of them. I have invested small amount with their other products, as I could not get enough confidence with them.

Some main features of Invoice Discounting for Investors are

Fixed, pre determined returns that usually vary from 10-15%
Fixed & Short Durations varying from 30 to 90 days.
Low Risk to High Risk depending on security structure of the deal. For example, if Invoices are protected by Bank Guarantees, then it is very low risk. If they are unsecured, then returns are higher & so is risk.

Why am I Investing in Invoice Discounting

Recently, I found myself planning for an event in March or April, requiring a considerable amount of money. The primary funding sources for this investment are FDs & other Debt instruments. This is where lies the challenge

FDs, Bonds mature on different dates (different months).
These maturing deposits end up idle in my savings account, earning minimal interest.

The options available

FDs: 2 or 3 month FDs offer pathetic returns.
T-Bills: Govt Secured short term investments that deliver around 7%, with almost 0 risk.
Debt Funds: Liquid debt funds are also a decent option & offer 7% with low risk.
Invoice Discounting: 30 to 120 days short term with 10-15% returns with low to very high risk

So I choose Secured Invoice Discounting that deliver 10-11% returns with very low risk because

Can’t afford the risk to loose principal right now & need repayment on fixed dates.
Altsmart & Altarmour offer Bank Guarantee at 10% and Credit Insurance Protection at 11% respectively.

Good Use Case for Invoice Discounting

This made me realise that Invoice Discounting can be a great investment option for short term where investors are planning for an event that requires large amount of money.

Large ticket events like marriage, buying property, investing PMS or SIF, higher education etc.
Secured Invoice Discounting offers fixed returns on fixed dates with good amount of security & lowered risk.
And the returns are still far better than FD or T-Bills. (10% compared to 5% or 7% in short term).

Great Option to Start with Invoice Discounting

Fixed income instruments can be overwhelming. If you’re new to this asset class, start with low-risk options like bank-guaranteed or insured invoice discounting.

When I began my journey six months ago, I experimented with riskier assets offering 14% returns. However, I’ve since realized that starting with low-risk options builds confidence & familiarity with the asset class without exposing your portfolio to undue risk.

Also, short term secured Invoice discounting can help investor plan their cashflows & reinvestments, earlier in their journey. Repayments are biggest USP of fixed income instruments, but they can be a challenge to manage and lead to lowered returns than expected.

Key Takeaways

Short-Term Planning: Invoice discounting can be a great option for short term investments, specially when planning for big ticket event like property, marriage, PMS, higher education etc.
Cash Flow Management: Its biggest advantage is providing fixed returns on fixed dates, but careful cash flow management is essential to avoid idle funds.
Entry Point for Beginners: For those new to alternate investments, low-risk invoice discounting offers a practical starting point with returns better than traditional instruments like FDs.

Final Thoughts

Invoice discounting can be an effective tool for managing short-term financial needs while earning better returns than FD or saving accounts or Debt Funds or T-Bills. If you’re considering this asset class, ensure you prioritize safety and align it with your cash flow requirements.

If this insight resonated with you, feel free to like, share, and subscribe. If you have any question from my investment journey that might help you, please feel free to ask. I would be happy to help.

—-
DISCLAIMER: This video is not an investment recommendation. Its purpose is not to promote or demote any company or investment. Its purpose to share personal experience in unbiased form so other fellow investors can learn & take better informed decision for themselves. I am not a registered financial professional. For any investment advise, please take help from a registered Financial Professional.