What is Invoice Discounting?
Invoice discounting is a financial service that allows businesses to unlock the value of their outstanding invoices before they are paid by customers. Instead of waiting 30, 60, or 90 days for payment, businesses can receive immediate cash by selling their unpaid invoices to a bank or NBFC at a discount.
This form of supply chain financing has become increasingly popular among Indian businesses, particularly MSMEs, as it helps bridge the cash flow gap that often occurs between delivering goods/services and receiving payment. Unlike traditional loans, invoice discounting doesn't add debt to your balance sheet—it's simply accelerating the conversion of receivables into cash.
How Invoice Discounting Works
- Invoice Creation: Your business delivers goods/services and raises an invoice on the buyer with payment terms (typically 30-90 days)
- Buyer Acceptance: The invoice is accepted or acknowledged by the buyer, confirming the obligation to pay
- Submit to Financier: You submit the invoice to a bank, NBFC, or TReDS platform for discounting
- Verification: The financier verifies the invoice authenticity and buyer creditworthiness
- Receive Funds: You receive 70-90% of the invoice value minus discount charges
- Collection: On the due date, the financier collects the full amount from the buyer
- Final Settlement: Any remaining balance (if held) is released to you after collection
Types of Invoice Financing
By Risk Allocation
- With Recourse: If the buyer defaults, your business must repay the financier. Lower discount rates apply (8-14%)
- Without Recourse: The financier bears the default risk. Higher discount rates apply (12-18%) as the financier typically purchases credit insurance
By Disclosure
- Confidential: Buyer doesn't know the invoice is discounted. You collect payment and remit to financier
- Disclosed: Buyer is informed and pays the financier directly. More common in India
By Advance Structure
- Full Discounting: Receive advance against the entire invoice value (typically 80-90%)
- Partial Discounting: Discount only a portion of the invoice value
- Selective Discounting: Choose specific invoices to discount rather than entire ledger
By Platform
- Traditional Banking: Direct arrangement with your existing bank
- TReDS Platform: Electronic bidding platform with multiple financiers
- NBFC/Fintech: Specialized non-bank financiers with digital processes
TReDS Platform Explained
TReDS (Trade Receivables Discounting System) is an RBI-regulated electronic platform that enables MSMEs to discount their invoices with multiple financiers through a competitive bidding process. This revolutionary system has transformed invoice financing in India by creating a transparent marketplace.
Key Features of TReDS
- Competitive Bidding: Multiple banks and NBFCs bid to offer the lowest discount rate
- No Collateral Required: Financing based on buyer's creditworthiness, not seller's assets
- Quick Settlement: T+0 or T+1 settlement once bid is accepted
- Transparent Pricing: All bids visible to sellers—no hidden charges
- Mandatory for Large Buyers: Companies with turnover >₹500 crore and CPSEs must register
How TReDS Works
| Step | Action | Timeline |
|---|---|---|
| 1 | MSME uploads invoice on TReDS platform | Day 0 |
| 2 | Buyer acknowledges the invoice on platform | Within 48 hours |
| 3 | Multiple financiers place discount rate bids | Real-time |
| 4 | MSME accepts the lowest bid | Within bid validity |
| 5 | Funds credited to MSME account | Same day (T+0) |
Operational TReDS Platforms in India
RXIL (Receivables Exchange of India)
Joint venture of SIDBI and NSE. Largest TReDS platform with extensive buyer and financier network.
M1xchange
Backed by Mayfair Group. Strong presence in manufacturing and services sectors.
Invoicemart (ATReDS)
Axis Bank promoted platform. Integrated with major corporate buyers.
MYND Platform
Emerging platform with focus on technology and user experience.
Eligibility & Requirements
Business Eligibility
- ✓ Registered business entity (Pvt Ltd, LLP, Partnership, Proprietorship)
- ✓ Minimum 2-3 years of business vintage
- ✓ Positive net worth and profitable operations
- ✓ GST registered and compliant
- ✓ Reputed corporate buyers (MNCs, PSUs, large corporates)
- ✓ Clean credit history with no major defaults
Invoice Requirements
- ✓ Valid commercial invoice for delivered goods/services
- ✓ Payment terms between 30-90 days
- ✓ Buyer acceptance/acknowledgment obtained
- ✓ Invoice not older than 90 days
- ✓ No disputes or claims on the invoice
- ✓ B2B invoices only (B2C not eligible)
Documents Required
Original invoice with acceptance, Goods Receipt (GR), Purchase Order copy, last 12 months bank statements, GST returns (GSTR-1), financial statements, list of major buyers with credit limits, pending invoice aging report, and Udyam Registration for MSME benefits.
Discounting Process Step-by-Step
Invoice Creation
Raise invoice on buyer with clear payment terms. Ensure all details are accurate and match the purchase order.
Buyer Acceptance
Get the invoice accepted by buyer. This can be through written confirmation, email acknowledgment, or TReDS platform acceptance.
Select Financier
Choose between your existing bank, NBFC, or TReDS platform based on rates, convenience, and relationship.
Submit Documents
Submit invoice, GR, acceptance proof, and other required documents to the financier.
Verification
Financier verifies invoice authenticity with buyer and checks buyer creditworthiness.
Receive Funds
Discounted amount credited to your account (typically same day on TReDS, 1-3 days for traditional banking).
Charges & Interest Rates
| Charge Type | Banks | NBFCs | TReDS |
|---|---|---|---|
| Discount Rate | 8% - 16% p.a. | 14% - 24% p.a. | 8% - 16% p.a. (competitive) |
| Processing Fee | 0.1% - 0.5% | 0.5% - 1% | 0.1% - 0.2% |
| Documentation | ₹500 - ₹2,000 | ₹1,000 - ₹5,000 | Minimal/Online |
| Late Payment | Additional interest | Penal charges | As per terms |
Cost Calculation Example
Invoice Value: ₹10,00,000
Credit Period: 60 days
Discount Rate: 12% p.a.
Processing Fee: 0.2%
Discount = ₹10,00,000 × 12% × (60/365) = ₹19,726
Processing = ₹10,00,000 × 0.2% = ₹2,000
Total Charges: ₹21,726
Amount Received: ₹9,78,274
Benefits & Risks
Benefits
- ✓ Immediate cash flow without waiting for credit period
- ✓ No additional collateral required (unsecured)
- ✓ Financing grows with your sales
- ✓ Better than high-cost borrowing
- ✓ Professional collection by financier
- ✓ MSME Samadhaan portal support for delayed payments
- ✓ Competitive rates on TReDS platform
Risks
- ✗ Recourse obligation in case of buyer default
- ✗ Cost can erode profit margins
- ✗ Buyer relationship may be affected
- ✗ Not suitable for disputed invoices
- ✗ Dependence on buyer creditworthiness
- ✗ Potential fraud risk with fake invoices
Banks vs NBFCs for Invoice Discounting
| Parameter | Banks | NBFCs |
|---|---|---|
| Interest Rate | 8% - 16% p.a. | 14% - 24% p.a. |
| Processing Time | 3-7 days | 1-3 days |
| Documentation | Extensive | Minimal |
| Eligibility Criteria | Stringent | Flexible |
| Best For | Established businesses with banking relationship | MSMEs, new businesses, quick funding needs |
MSME Invoice Financing
MSMEs are the biggest beneficiaries of invoice discounting and TReDS platforms. The government has implemented several measures to support MSMEs in accessing timely finance against their receivables.
MSME Samadhaan Portal
Online platform launched by Ministry of MSME to monitor delayed payments and facilitate conciliation between MSMEs and buyers.
- Filing Complaints: MSMEs can file delayed payment complaints online without any fees
- MSE Facilitation Council: State-level councils conciliate between MSME and buyer
- Mandatory Interest: Buyers must pay compound interest at 3 times the RBI notification rate for delayed payments
- Monitoring: Tracks payment delays and names habitual defaulters
Government Support for MSME Invoice Financing
- ✓ CGTMSE Coverage: Credit guarantee for MSME loans including invoice financing
- ✓ Interest Subvention: 2% interest subvention for MSMEs under certain schemes
- ✓ TReDS Mandate: Large corporates must accept MSME invoices on TReDS
- ✓ PSL Status: Bank lending to MSMEs (including invoice discounting) counts as Priority Sector Lending