Project report for Invoice discounting/ Bill discounting

Executive Summary

97% of the SMEs in India experienced late payment on the Invoices. 56% of Indian MSME are dealing with working capital issues due to the late payment on their invoices.  Invoice discounting is a source of working capital finance for the seller of goods on credit. Bill discounting is an arrangement whereby the seller recovers an amount of sales bill from the financial intermediaries before it is due. Such intermediaries charge a fee for the service. This practice of discounting bills globally is much more prevalent than we think and has been a recognized mode of alternative financing in the developed nations. With the changing time, a need for seamless working capital flow has been identified on a global level. Bill discounting is becoming the best form of getting working capital as there are no collaterals, and it is cost-effective and time-efficient. It also gives the added benefit of using the hidden items in your balance sheet, such as receivables, to get the much-needed cash. And with SMEs emerging on a daily basis, bill discounting and its advantages have become the need of the hour. The gap between the funding requirement in India and the availability is as wide as Rs 2.9 trillion! So obviously, a need arose to bridge the gap. Since traditional banking systems weren’t able to keep up with the pace of changing trends, alternative financing solutions such as invoice discounting came up to solve the working capital issues.

Opportunity - Problem & Solution

The financial services landscape in India is largely controlled by banks and NBFCs. The role of private banks has been crucial and the government’s role in issuing new banking licenses to the likes of Yes Bank, Kotak Mahindra Bank, and Axis Bank was an important inflection point. However, there is still a huge gap between demand and supply of finance, especially for small and mid-sized companies. Of course, lending against collateral is one way to solve it, but the time to disperse fund and availability of collaterals, are always a burden to MSME vendors and small service business to regulate the working capital. The huge interest rate associated with private lenders will always eat the profit margin and its unfavorable to the small industries. At the same time, banks found it difficult to fund to the small industries with there available collaterals and disperse the amount in a short time. The normal term loan or working capital loan needed a lot of paper works and documentation and less attractive to small business. 

Invoice discounting / bill discounting is an alternative way of lending. Invoice discounting is the practice of using a company's unpaid accounts receivable as collateral for a loan, which is issued by a finance company.  The firm is focusing to be an aggregator in this field. The company have good access to corporate companies and will connect the Banks & NBFCs to get the working capital funding for the small vendors by taking a very small percentage as commission. The market size of Indian invoice discounting market is around USD 100 billion.  The small and medium enterprises are discounting bills worth more than. Rs 1,200 crore a month as they try to improve their working capital needs with the Non-Banking Finance Companies holding back from lending. So the need for an aggregator who can connect the buyer with multiple investors is added advantage. 


About the service

The firm is planning to be a successful aggregator in the invoice discounting market. The company plans to be in an online platform but the resource crunched small vendors don't have time or knowledge to sit and fill the online forms in detail. So the offline presence is a key in this market. The firm will do all the manual verifications and documents needed and also completes the invoice certification. Also, the firm is focusing only on infrastructure and construction projects. So from this, it is clear that the company wants to drill down to the niche market and capture the specific domain in an aggressive way. Firm  plan to induct around 3 sales executive to reach out to all working site of large corporates such as Tata, Reliance, GMR,J.Kumar Infra and L&T in the initial quarter.  The ticket size of each loan is around 10 lakhs worth bills. The web-based platform helps the executives to enter details from the ground and company.

The ground staff of the company will be available in all the work sites in India. The company is planning to focus on construction and infrastructure fields where a minimum of 250 vendors was present on an average. At present, the firm has identified around 8 such locations and more locations were identifying. The field staff will collect the basic details of the vendors who are looking for invoice discounting and only target for a monthly invoice amount of 10 lakh rupees. The firm will cross-check the validity of the invoice with the service provider and assure the invoice credibility. Then the invoice and other documents about the vendor will be collected and submit to the banks or financial institution. The bank or financial institution will provide only 65% of the fund for the given invoice and the amount will be transferred within 24 hours after submitting the details.

Market potential

Medium, small and micro enterprises (MSMEs) operate on tight margins and need an immediate settlement of invoices to avoid the shortage of working capital. However, due to the poor bargaining capacity of MSMEs, their working capital often remains blocked in receivables as they work on an unfavorable credit cycle for goods and services supplied to corporate buyers. This problem is exacerbated due to the existence of a huge funding gap for MSMEs. In order to bridge the gap between invoice date and its due date, invoice discounting emerged as a financing solution for entities which are unable to access funding options such as short term credit and working capital loans. Under invoice discounting, the seller, instead of waiting for the payment to be made by the buyer, gets a certain percentage of the invoice amount from the financier in advance. The market of Indian Invoice discount industry is around USD 100 billion, the industry is growing day by day as the economy of India is growing and great investments are happening in construction, infrastructure, logistics and manufacturing sector. The development in the basic infrastructure and manufacturing industry results in the market growth of invoice discounting industry. 

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