Calculate the cost of invoice discounting, net proceeds received, and effective interest rate. Compare against bank overdraft to choose the best working capital option.
How Invoice Discounting Works in India
Invoice discounting lets businesses convert unpaid sales invoices into immediate cash. The lender advances a percentage of the invoice value (typically 70–90%) upfront. When your buyer pays, the balance is released after deducting interest and fees.
Invoice Discounting — You manage collections. Customer does not know you have discounted the invoice. Confidential arrangement. Lower cost typically.
Factoring — The financier takes over collections. Customer pays directly to the financier. More visible but removes your collection burden.
TReDS for MSMEs
TReDS (Trade Receivables Discounting System) is an RBI-regulated platform that allows MSMEs to discount invoices raised against large corporates. Rates are typically 8–12% per annum — significantly cheaper than traditional bank credit. Major platforms: RXIL, M1xchange, Invoicemart.
When to Use Invoice Discounting
Use it when: you have long credit terms (60–120 days) with buyers, your business is growing fast and needs working capital, or you want to avoid taking on term debt. The cost is only for the period you use it — unlike an OD that has commitment fees.
Frequently Asked Questions
Invoice discounting is short-term borrowing against outstanding invoices (receivables). A lender advances 70–90% of the invoice value upfront. When the buyer pays, the remaining amount (minus fees) is released to the seller. It improves working capital without creating term debt.
Rates typically range from 10–18% per annum depending on the credit quality of the buyer, invoice tenure, and platform/lender. TReDS platform rates are typically 8–12% for MSME invoices against large corporates. NBFCs charge 14–18%, and fintech platforms 12–20%.
TReDS (Trade Receivables Discounting System) is an RBI-regulated electronic platform for MSMEs to discount their trade receivables raised against large corporate buyers. It connects MSMEs, buyers, and financiers. Major platforms include RXIL, M1xchange, and Invoicemart. Mandatory for large companies with ₹500+ crore turnover to onboard on TReDS.
Typically required: GST invoice, purchase order, e-way bill (where applicable), goods receipt confirmation from buyer, and bank account details. For TReDS, buyer confirmation on the platform is the key document. Banks may additionally require audited financials and KYC documents.