Invoice Discounting: Meaning, Types & Benefits Explained

Invoice discounting is a popular financing solution that helps businesses unlock cash tied up in unpaid invoices. This blog explains its meaning, types, benefits, and process in detail.

What is Invoice Discounting?

Invoice discounting is a short-term borrowing method where businesses use their unpaid invoices as collateral to raise funds from financial institutions. It helps improve cash flow without waiting for customers to pay. Unlike traditional loans, invoice discounting is based on the value of receivables, making it ideal for businesses with high credit sales.

What is Bill Discounting and How it Differs from Invoice Discounting?

Bill discounting involves selling trade bills to a bank at a discounted value before the due date, whereas invoice discounting uses invoices as collateral for a loan. Here is a quick comparison:

How Does Invoice Discounting Work?

• Submit Unpaid Invoices to the Lender: The business provides its outstanding invoices to the lender, showcasing the amount due and the payment terms agreed with customers.
• Verification of Invoice and Customer Creditworthiness: The lender reviews the authenticity of the invoices and assesses the creditworthiness of the customers to ensure timely payment.
• Advance of Funds up to 80–90% of Invoice Value: Once verified, the lender releases a significant portion of the invoice amount, typically 80–90%, as an advance to the business, improving cash flow instantly.
• Customer Pays Invoice on Due Date: The customer makes the payment directly to the business or, in some cases, to the lender, as per the agreed arrangement.
• Settlement of Balance Amount After Deducting Fees: After receiving full payment, the lender deducts its service fees and interest charges, and the remaining balance is transferred to the business.

Who Can Use Invoice Discounting in India?

Invoice discounting is ideal for businesses that operate on credit terms and maintain strong, trustworthy relationships with their customers. It provides quick access to working capital without waiting for invoice payments. Typically, the following eligibility criteria apply:

• Registered Business with GST Compliance

The company must be legally registered and adhere to Goods and Services Tax regulations, ensuring transparency and credibility.

• Minimum Turnover as Specified by the Lender

Lenders generally require businesses to meet a certain annual turnover threshold, which demonstrates financial stability and repayment capacity.

• Invoices Raised on Reputable Customers

The invoices should be issued to well-established clients with a proven track record of timely payments, reducing the risk for lenders.

• No History of Payment Defaults

Businesses must have a clean repayment history, as lenders assess past performance to gauge reliability and minimise credit risk.

Invoice discounting is most suitable for SMEs, exporters, manufacturers, and service providers who frequently deal with delayed payments but need immediate liquidity to maintain operations and growth.

Also Read: GST Registration Process: How to Apply Online

Types of Invoice Discounting Explained

• Confidential Invoice Discounting: Keeps financing arrangement hidden from customers.
• Whole Turnover Invoice Discounting: Covers all invoices for continuous funding.
• Selective Invoice Discounting: Allows businesses to choose specific invoices for discounting.

Advantages and Disadvantages of Invoice Discounting

Invoice discounting offers several benefits for businesses that need quick access to working capital. One major advantage is improved cash flow, as companies do not have to wait for customers to clear invoices. It also eliminates the need for additional collateral, making it a convenient option for businesses with limited assets. Moreover, funding is flexible and linked to sales, meaning the more invoices you generate, the more liquidity you can access. This helps maintain a healthy working capital cycle and supports day-to-day operations.

However, there are some drawbacks to consider. The cost of discounting can be high, as lenders charge fees and interest for the service. It is also unsuitable for businesses dealing with customers who have poor credit histories, as lenders rely on customer reliability for repayment. Additionally, invoice discounting requires strong invoice management and accurate record-keeping, which can be challenging for businesses without robust systems in place.

How to Use Invoice Discounting for Services and Invoicing

Service-based businesses can leverage invoice discounts by submitting invoices for completed projects. For example, IT firms and consultancies often use this method to maintain liquidity while waiting for client payments.

How to Get Started with Invoice Discounting in India: Stepwise Guide

• Evaluate Your Funding Needs and Eligibility

Assess how much working capital you require and check if your business meets basic criteria such as GST registration, minimum turnover and strong customer credit profiles.

• Choose a Trusted Lender or Platform

Research banks, NBFCs and fintech platforms offering invoice discounting. Compare interest rates, processing fees and service reliability before deciding.

• Submit KYC Documents and Invoices

Provide business registration details, GST certificates and identity proofs along with unpaid invoices for verification. Ensure invoices are accurate and issued to reputable customers.

• Agree on Discounting Terms and Fees

Review the lender’s terms, including the percentage of advance (usually 80–90%), interest rates and any hidden charges. Negotiate where possible for better rates.

• Receive Funds and Manage Repayments

Once approved, funds are credited to your account quickly. Maintain proper invoice tracking and ensure timely repayment after customers settle their dues to keep your credit profile strong.

Business Loan as an Alternative to Invoice Discounting

While invoice discounting helps businesses unlock funds tied up in unpaid invoices, it may not always be

the most suitable option, especially for companies seeking a larger or long-term financial solution. In such

cases, a Business Loan serves as a reliable alternative. Unlike invoice discounting, which depends on

customer payments, a Business Loan provides a fixed amount upfront, enabling businesses to manage

working capital, expand operations or invest in growth without waiting for receivables.

Also Read: What is Business Loan: A Complete Guide

To plan repayments effectively, businesses can use a Business Loan EMI Calculator, which estimates

monthly instalments based on loan amount, interest rate and tenure, ensuring better financial control.

Apply now for a Business Loan.

FAQs

Q.1. Is invoice discounting suitable for small businesses in India?

A. Yes, it is ideal for SMEs with regular credit sales and strong customer relationships.

Q.2. How much advance can businesses expect from invoice discounting?

A. Typically, lenders offer 80-90% of the invoice value as advance.

Q.3. What are the eligibility criteria for purchase bill discounting?

A. Businesses must have valid invoices, GST compliance and reputable customers.

Q.4. How safe and secure is invoice discounting?

A. It is safe when done through regulated lenders and platforms with proper agreements.

Q.5. Can service providers invoice discount their receivables?

A. Yes, service providers like IT and consulting firms can use invoice discounting for liquidity.

Disclaimer:

The content presented on this page, including images and factual information, is intended solely as a summary derived from publicly available sources. GHFL/GFL (“Company”) does not claim ownership of such information, nor does it represent that the Companies have exclusive knowledge of the same. While efforts are made to ensure accuracy, there may be inadvertent errors, omissions, or delays in updating the content. Users are strongly encouraged to independently verify all information and seek expert advice where necessary. Any decisions made based on this content are solely at the discretion and responsibility of the user. Godrej Capital and its affiliates assume no responsibility for any loss or damage that may result from the use of or reliance on the information provided herein.