Are you on the lookout for exciting investment options that promise impressive returns? We’ve all heard of fixed deposits, mutual funds, and initial public offerings, but there’s another avenue worth exploring: invoice discounting.
Invoice discounting operates in a simple way. When small and medium enterprises (SMEs) and startups supply goods to large corporations, they often face lengthy payment delays of up to four months. To overcome this financial crunch, they seek cash advances from banks or non-banking financial companies (NBFCs) against their pending invoices. The interest rates on these working capital loans can be as high as 18% to 30% per annum.
Seeing an opportunity in this space, online discounting platforms entered the scene, offering financing to vendors at competitive rates (usually 14% to 18% per annum). They even opened the doors to retail investors, offering tempting pre-tax internal rates of return (IRR) ranging from 10% to 13%.
However, before diving in, it’s crucial to consider the risks:
Defaults have been witnessed, and credit rating systems may not always be reliable.
Concentration risk, where a significant portion of deals come from just a few companies, is another concern.
Performance metrics can also be misleading, leading to inflated expectations.
But fear not! There are potential solutions. There are online platforms regulated by the Reserve Bank of India (RBI) that offer more transparent investment opportunities. Additionally, if the RBI opens up Trade Receivables Discounting System (TReDS) for retail investors, it could open new opportunities and growth horizons for this asset class.
Before you jump in, remember that these investments may not suit everyone’s risk profile. Understanding the potential risks and rewards is essential to making sound investment decisions.
To read the full article originally published by Mint and gain valuable insights into invoice discounting, click here.
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