Invoice Discounting

Invoice discounting is a form of short-term borrowing where you use your unpaid invoices as collateral to get immediate cash. A lender (bank or fintech platform) advances you 70-90% of the invoice value upfront. When the client pays, the lender takes their cut (a fee, typically 1-3% of the invoice value) and releases the remainder to you.

It's different from invoice factoring, where the lender takes over the collection process and your client pays them directly. With invoice discounting, you retain control of the client relationship — the client usually doesn't know you've discounted the invoice.

In India, platforms like KredX, Tally, and various NBFC offerings provide invoice discounting for SMEs. The TReDS (Trade Receivables Discounting System) platform, regulated by RBI, facilitates invoice discounting between MSMEs and corporate buyers through authorized exchanges.

When does this make sense? If you have a large outstanding accounts receivable balance and need cash to cover payroll, rent, or project expenses, invoice discounting bridges the gap. It's faster than a business loan and doesn't require fixed asset collateral.

The cost is the key consideration. A 2% discount fee on a Net 30 invoice is effectively a 24% annualized interest rate. It's useful for short-term cash flow gaps but expensive as a permanent financing strategy. The better long-term fix: shorter payment terms and automated collection.