The Risks That Invoice Discounting Entails

Invoice discounting can give potential high returns over a short period of time, but lack of regulation make them a high-risk investment

- Shoaib Zaman

Shoaib Zaman

Credit risk is a concern, which arises if the debtor fails to pay the invoice on time due to financial issues. Also, the sector is mostly unregulated

Many investors, driven by the desire for strategic diversification and higher returns, continually explore different debt options. Invoice discounting has emerged as a popular choice among such fixed-income options as it offers a unique opportunity to investors to provide immediate liquidity to businesses by purchasing their unpaid invoices at a discount.

Says Suman Lahiri, certified financial planner (CFP), founder and chief investment officer (CIO) of Plan Your Money, a provider of financial products, “The attractiveness of invoice discounting is due to its shortterm nature and high returns—11-15 per cent annualised return.”

It became especially popular during the pandemic. Says Yash Roongta, founder of Alt Investor, India’s largest alternate investing community platform: “Invoice discounting is popular among retail investors, as it offers lucrative return compared to fixed deposits on short-term transactions of 30-90 days.”

HOW DOES IT WORK?

Invoice discounting allows businesses to sell their accounts receivable (unpaid invoices) to a third party at a discount before the payment due date. This provides the business with immediate access to funds tied up in outstanding invoices, enhancing liquidity and enabling more effective cash flow for the business. For investors, it is an opportunity to earn higher returns over a short term.