Number of days | Number of orders | Sale price | Cost of the product | Profit | Total Profit |
30 | 1 | 100 | 90 | 10 | 10 |
60 | 2 | 100 | 90 | 10 | 20 |
90 | 3 | 100 | 90 | 10 | 30 |
120 | 4 | 100 | 90 | 10 | 40 |
150 | 5 | 100 | 90 | 10 | 50 |
180 | 6 | 100 | 90 | 10 | 60 |
210 | 7 | 100 | 90 | 10 | 70 |
240 | 8 | 100 | 90 | 10 | 80 |
270 | 9 | 100 | 90 | 10 | 90 |
300 | 11 | 200 | 180 | 20 | 110 |
330 | 13 | 200 | 180 | 20 | 130 |
360 | 15 | 200 | 180 | 20 | 150 |
Number of days | Number of orders | Sale price | Cost of the product | Profit | Total Profit |
5 | 1 | 99 | 90 | 9 | 9 |
10 | 2 | 99 | 90 | 9 | 18 |
15 | 3 | 99 | 90 | 9 | 27 |
20 | 4 | 99 | 90 | 9 | 36 |
25 | 5 | 99 | 90 | 9 | 45 |
30 | 6 | 99 | 90 | 9 | 54 |
35 | 7 | 99 | 90 | 9 | 63 |
40 | 8 | 99 | 90 | 9 | 72 |
45 | 9 | 99 | 90 | 9 | 81 |
50 | 10 | 99 | 90 | 9 | 90 |
55 | 12 | 198 | 180 | 18 | 108 |
60 | 14 | 198 | 180 | 18 | 126 |
65 | 16 | 198 | 180 | 18 | 144 |
70 | 18 | 198 | 180 | 18 | 162 |
HOW THIS WORKS?
In this process, the seller sends goods or services to the buyer who happens to be big MNCs. The invoice is then confirmed by the MNCs. This invoice is then discounted with the help of invoice discounting firms. The credit period would have been 30 days but these firms will say make payment to sellers after just 5 days with a slight reduction say of 1 percent.
HOW IS THIS DIFFERENT FROM BANK LOAN?
Banks also provide working capital loans but the rate of interest is quite high which is not feasible for most enterprises.
BENEFITS FOR THE SELLERS
- Availability of funds within a short span of time.
- Collateral free working capital loans are available.
- Deploying funds increase the growth prospects of the company.
- Low risk as the invoice is selected from authentic buyers.
TYPES OF INVOICE DISCOUNTING
Confidential invoice discounting- the process remains the same here just the fact that the buyer is not aware that the invoice has been discounted. This adds a sense of reliability to the sellers for the buyers.
Confidential invoice discounting with an escrow account- we just add an extra layer of security where the payment is being made to an escrow account which then transfers the amount to the discounting firms.
Self invoice discount- this is the most common technique where if the buyer pays immediately gets a discount of say 2 percent and after 30 days will have to make full payment.
Crowdfunding- herein, a large pool is created and then this pool is used for discounting. The two most popular crowdfunding platforms are KredX and Trade credit.
RISKS INVOLVED
Needless to say, invoice discounting being a very lucrative resort carries with it two major risks.
1. CREDIT RISK- What if the buyer doesn't pay.
- It is the risk of default by the paying party.
- Risk assessment is required to lower this risk
- Understanding the financial health of the buyer ( if listed low risk)
- The credit rating of short term debts ( by credit rating agencies)
- Historical patterns of payments deployed
2. DURATION RISK- higher the duration of payment higher the risk of default.
- If the payments have to be received from the same buyer within 30 days and 60 days there is more uncertainty in 60 days.
- In order to lower duration risk, invoices of the lower span should be selected.
WHAT IS IN FOR YOU TO TAKE?
Crowdfunding is a platform where small investors like us can easily invest their money and avail numerous benefits:- Short payment cycle so there is liquidity
- A diversified portfolio of invoice ( say you have 5 lakhs to invest, instead of investing in the same invoice 1 lakh each can be invested in 5 different invoices )
- Minimal risk as the invoice are authenticated ( complete authentication of buyers and sellers)
- High returns compared to other asset classes
- There is a risk analysis system to safeguard the interest of investors.
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