Sales Invoice Discounting

Frequently Asked Questions on Sales Invoice Discounting
  • Who are the participants of sales invoice discounting?

    Sellers (SME businesses), their B2B buyers (customers of the SME) and financing institutions (lenders) are the participants of sales invoice discounting.

  • Who can participate in sales invoice discounting?

    Invoice discounting is for all SME businesses like manufacturers, service providers and distributors, who sell something to a B2B customer and the goods or service are provided on a credit basis. Therefore, any B2B seller can participate in invoice discounting.

  • How much loan can be raised from sales invoice discounting?

    SMEs can raise funds up to 90% of the outstanding invoice amount.

  • Which are the common industries that use sales invoice discounting?

    It is suitable for a wide range of industries like construction, logistics, textiles, transport industries as well as providers of services such as software companies, hotels, healthcare, transportation etc.

  • What are the advantages of sales invoice discounting?

    The biggest advantage of invoice discounting is a steady flow of cash that helps to bridge the gap with revenue thereby increasing the business turnover. It mainly helps businesses to generate working capital finance for providing goods or services on credit. It is much easier and cheaper than applying for a bank loan.

Sales Invoice Discounting process explained
  • What is sales invoice discounting?

    Sales Invoice Discounting or Bill Discounting is a way in which a business can borrow short term funds from banks or financial institutions based on the outstanding invoices of their buyers. Under sales invoice discounting, the SME provides the unpaid bills to a lender or financial institution and in return, receives funds up to a maximum of 90% of the outstanding invoice value. It helps keep the business’s cash inflow constant while they wait for payment from their B2B customers.

  • Why is sales invoice discounting needed?

    Generally, in small businesses, the entrepreneur sells goods or services to B2B customers in large quantities and on credit. When a sales transaction is carried out on credit, it means the payment for such purchases shall be made by the customer (buyer) at a later date. However, extension of such a credit period creates a shortage of working capital for the seller since they receive payment at a future date thereby locking the amount receivable. So, rather than waiting for the credit cycle to end, small entrepreneurs can borrow money with the help of sales invoice discounting and invest it in growing the business.

  • How does sales invoice discounting work?

    The borrower can submit a loan application on the Artha Credit platform against a sales invoice raised by him / her on a customer. Borrower is funded up to a maximum of 90% of the face value of the invoice. A minimum buffer of 10% of the face value of the invoice is retained by the lender. The exact funding proportion is dependent on each individual lender’s internal policy and risk appetite.

    The actual net amount disbursed to the borrower is the loan amount (up to 90% of the invoice value) less the discounting fees which is a combination of the interest amount and service charge(s) as applicable. The discounting fees is deducted upfront by the lender to account for the interest amount payable on the loan (interest rate p.a. multiplied by the tenor of the loan) as well as any additional charges. The net amount is credited to the borrower’s bank account as provided on the Artha Credit platform.

    Sales invoice discounting allows the borrower to receive instant credit against the invoice, which would have otherwise been received only at the end of the credit period. Later, when the borrower’s customer pays back to the borrower at the end of the credit period, the borrower can repay the amount to the lender or the lender may require the sales proceeds to be credited directly to the lender on the payment due date. The lender thereafter, services the loan principal and remits the balance funds to the borrower’s bank account.

  • Why is sales invoice discounting helpful?

    The most significant benefit of Invoice discounting is the ability to generate quick cash required in the business. Apart from this, the invoice discounting facility offers some more subtle benefits to the company as under:

    • Invoice discounting is used to maintain the balance between expenses and cash inflows daily
    • With invoice discounting, businesses can understand their cash flow in a better manner as the cash which is locked-up due to unpaid invoices is quickly released.
    • An instant cash availability gives a financial momentum to the business.
    • Allows the Business to stop chasing the customers for payment. Instead, they can carry out business easily with available funds and provide its customers with a softer credit period.
    • It helps in strengthening cash flow as the business can generate cash quickly due to quicker processing time.
    • Invoice discounting is an excellent alternative to overdraft facility or business loan.

  • Factors on which invoice discounting depends:

    The following are the factors which are taken into consideration for invoice discounting:

    • The financial requirement of the business
    • Monthly financial turnover of the business
    • Active customers of the business
    • The total outstanding amount of invoices and the average period of collection

  • Basic documents required to avail Sales Invoice Discounting facility

    Here is a list of documents required by the lender to provide Sales Invoice Discounting facility:

    • Address Proof of Business and Business Owner
    • Business Registration Proof and ID proof of Owner
    • Sales Tax registration certificate
    • Filed Sales Tax Returns for 1 year
    • Income Tax ID for the Business and Business owner
    • Six months’ bank statement for the Business and the Business Owner
    • One years’ Audited financial statements of the Business
    • Copy of Sales Invoice being discounted
    • Documents pertaining to any collateral being offered (if applicable)