There’s a need to technologically enhance invoice discounting in India

As part of a wide range of industries, invoice discounting accelerates payment against approved bills by agreeing for a cash discount directly to the buyer or through a financier, who in turn collect the full amount. ​

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With invoice financing, SMEs are able to resume the regular flow of work, recover the cash flow, andclear the dues, in addition to reinvesting the capital in scaling the venture.
By Nipun Kohli

One of the leading impediments to overall health and sustainability of supply chains is the uncertainty in payments. As a consequence, the small-scale vendors find themselves in uncharted territories after delivering the goods and no certainty on the payments. With the funds locked away
on an average for 57 days, taking up new projects or completing ongoing assignments becomes difficult for most MSMEs.


Thus, invoice discounting, can be the magic wand that has the potential to unlock working capital for SMEs, thereby expediting the entire process of procurement to the payment cycle. As part of a wide range of industries, invoice discounting accelerates payment against approved bills by agreeing for a
cash discount directly to the buyer or through a financier, who in turn collect the full amount.

Emergence of Tech Platforms for Invoice Discounting
In a world that is being rapidly transforming and being disrupted by technology, the invoice discounting discipline is also undergoing several radical transformations. In the past couple of years, several technology platforms have come of age to introduce efficiencies, speed, and dynamism in
the process of invoice discounting.

The tech platforms sit between the corporate buyers and their network of suppliers across products and services to get details of booked invoices. Once the invoice details flow into the platform, the rate of discounting is calculated and shown to the supplier. These platforms also take care of the
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accounting entries discounted through the platform to ensure timely payment to the suppliers.

With invoice financing, SMEs are able to resume the regular flow of work, recover the cash flow, and
clear the dues, in addition to reinvesting the capital in scaling the venture.

Tech Disruptions: A Reckoning
In the past few years, the government has become proactive in promoting the usage of fintech platforms, in order to drive the economic growth for the MSMEs. To the same end, machine learning and blockchain technology has emerged to be a solution for making the process involving multiple
parties, transparent and secure.

Invoice discounting provides the perfect scenario for the blockchain technology, as the process typically involves multiple stakeholders. Furthermore, traditional bank supplier finance and alternate solutions like TReDS are complementing the fintech players in providing alternate sources of capital.
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How invoice discounting will evolve?
The blockchain-based ledger doesn’t allow anyone to tamper with the records and the automated payments via smart contracts make the process run smoothly. The benefits of blending machine learning and AI with the latest blockchain technology can be many folds:

Streamlined & Expedited Invoice Verification
In the current scheme of things, accounts payable and accounts receivable systems need to reconcile for the process of invoice verification. The technological influx in the field of invoice discounting bypasses the need for waiting for a physical invoice. Technology can connect the buyer and seller
systems, thus checking the invoice booking against the PO, GRN, and QC. With technology, the need for manual verification between trade documents is also eliminated.

Currently, there is no fixed standard for existing systems leading to a lot of confusion. However, the blockchain based process will allow different parties involved to reconcile in real-time, when a transaction takes place.

It is particularly useful in the case of logistics companies that tend to have rather complex processes, involving different formats of invoices, delays in sharing proof of delivery and more. Technology helps in ensuring seamless booking of invoices and eliminating the need for meeting which tends to
stretch the process.

Dynamic Rates incorporating micro and macro forces
The conventional approach of invoice discounting offers a fixed rate of discounts, without differentiating between the dynamic factors affecting the supply chain. Such solutions also tend to neglect the macro factors affecting the transaction, which are subject to sporadic changes on a daily
basis and affect the demand and supply of funds.

However, technology platforms leveraging machine learning and AI are able to provide dynamic discounting rates to its users. These rates discover the market clearing rate every day, depending on a bunch of macro and micro factors.

SME Financing to be based on true merit
Introducing the latest technology in invoice discounting also opens floodgates of opportunities for the SMEs to receive working capital financing in a seamless manner. Conventionally, investors look into the SME’s financials while taking the credit decision. However, with the latest technology,
financing will be based on leading indicators of data like the transaction data and not merely on the
financials.

SMEs with approved invoices can approach financial institutions for working capital. Since the information is made available on a distributed ledger, financial institutions will have ready proofs required for supporting the decision. This will also eliminate any question of duplicate invoice
financing. Furthermore, the tech-driven processes will make it easier for SMEs to receive financing at various stages of the entire procurement to pay cycle (pre or post shipment) while providing complete transparency to the auditors about the progress.

Lastly, the introduction of technology would take the pain way from reporting or decision making. Given the connected systems, companies have access to real-time dashboards and will thus be better equipped to generate reports and taking critical businesses decisions.

The writer is Co-Founder & Director, Priority Vendor.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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