I discovered the concept of invoice discounting when a then-colleague told me about a startup his ex-manager had founded. I got looking into the concept, and discovered in 2019 that there were a couple of players. Being inquisitive and reasonably risk-embracing, I jumped on.
Getting onboarded
Almost all platforms today have contactless onboarding and KYC. They link your bank account for fund transfers in/out as part of this process. Usually a 24-48 hour process at the maximum, convenience of onboarding is probably one reason I did not get cold feet.
Understanding deals available
Remember that the platform does the verification of the invoices, along with the due diligence of the enterprise (The company who is the debtor) as well as the vendor (the person who is owed the money+ is the seller of the goods to the enterprise). Most platforms have a "proprietary" scoring algorithm which I really have not understood. But as with all scores, higher the score, lower the risk of default.
The main reason these platforms exist is because they offer fractional investing options to people like you and me. In other words, if there is an invoice of 50 lacs, it can be picked up by 15-20 people depending on the platform's minimum investment amount.
Transacting on the platform
It is usually seamless. Most platforms have an app and web interface.
You can transfer funds in via netbanking, NEFT or RTGS to an e-account that the platform has in your name. This e-account is like a temporary holding account till you use your funds. The funds are held in your name, and not on the platform's name.
You can use the funds in your e-account to buy a deal you are interested in. When you look at a deal, you will usually find the tenure of the deal, a risk score and the gross /net returns. The difference between gross and net returns is the platform's share in your transaction.
The returns are shown as annualized. In other words, do not take the returns to be absolute , but pro-rate your returns for the period of your investment.
Example:
There is a deal for INR 48lacs, where the enterprise is "Flipkart India" (making this up, its more likely to be retailnet or cocoblu which are the largest sellers on ecommerce sites). The vendor is XYZ Inc which has supplied fashion garments to Flipkart.
Since flipkart's history of payments on the platform is good, the credit score may be good. However, if this seller is a new seller for flipkart, then the score may be adjusted downwards. We can't see what happens because, you know, "properietary" algorithm.
You look at this and want to invest. The minimum investment is INR 3Lacs, which you are fine with. You see that only INR15 Lacs is now available since other investors have already put in their funds.
The tenure is 90 days, and the gross returns are at 12%, with net returns being 11%. Which means that the invoice is really for INR 49.4Lacs. In other words, the vendor will get INR 48 lacs immediately against an invoice of INR 49.4Lacs which is due in 90 days.
You click on an "invest now" button. You will get an e-contract to digitally sign usually with OTP authentication.
Once you do sign, your money (along with other investors' money)is moved from your e-account to an "escrow" account - a temporary account earmarked for this deal .
After the entire invoice is sold, or the selling deadline is past, the funds are released to the vendor by the platform
Assuming the enterprise pays the invoice amount exactly on time, the plaform will receive INR 49.4Lacs on the due date, and will withhold 1% charges and give you the promised 11% return by credit back into your e-account.
Building this into your portfolio
This is still a high risk investment with annualized pre-tax returns of 10-14%. Platforms do tend to claim returns upto 20%, but I have yet to see those returns. If you do want to explore this further, start with invoices on large known enterprises and good repayment history. Avoid parking all your funds into one invoice or enterprise. And figure out what your risk appetite is. I would not go beyond 10-15% of full portfolio in alternatives, and that also is on the higher side. Remember that these are short term investments, and should be redeployed or withdrawn on maturity, else you are leaving the money idle. These are also mostly illiquid for the tenure of maturity. Some platforms allow for resale of your investment to liquidate funds, but not all.
My Experience
I have used KredX and Trade Cred platforms, and I've had a good experience for over 3 years. TradeCred had lower minimums, where as KredX had shorter term deals. I've had one default on KredX, and I was lucky because my investment was less than 20% of the minimum investment needed. This was because I was the last investor on that deal and i picked up whatever was left (minimums do not apply at that stage). This default incidentally was a big brand - Future Retail, which went bankrupt. To be fair, I have received 50% of the investment back and the platform has been actively pursuing legal action. This however does highlight the fact that even large enterprises do not necessarily indicate credit worthiness. My portfolio return has been over 13% annualized. I also do have a good relationship manager who ensures money is never idle.
Platforms available
KredX: Probably one of the first players in this space, and seems to be well-funded. They have a minimum investment ticket size of INR 3 Lacs. Here is a link for signing up. In full disclosure, I've referred multiple people, but I've never figured out if the referral rewards actually work!!! They cover several new age enterprises like Zetwerk, Delhivery, Coco-Blu (amazon's largest seller), WonderChef etc. App is nice too. They experimented with adding PMS, Bonds and Gold/Silver but those have not lasted the test of time.
TradeCred: Has been around for the same time as KredX. Have a minimum ticket size of INR 50K. They have now added other investment options including FDs, bonds etc but via offline mode. I stopped using them a while back, because their deal tenures were getting longer. Tenures of 1 year and beyond have become common. Here is the referral for them. Again, I don't have a clue what this referral coupon actually does!
Jiraaf: Has multiple options including invoice discounting, unlisted debt, etc. Their minimum ticket size for invoice discounting is around INR 1Lac, but can be lower depending on the deal. I haven't personally traded on this platform (yet), but It has been recommended for invoice discounting by at least one serious investor. Here is the link - again, no experience with referral
Orowealth: Has multiple options including mutual funds. Invoice discounting starts with INR 50K. I see this name crop up on articles on alternative investment, but I haven't had a personal recommendation thus far.
There are several others which crop up on google search, but those are B2B and not open to retail investors.
The bottom line
Invoice discounting is a genuine business concept, but it is still high ticket size and an unknown asset class. Also, there is no clear regulation for this segment, but that may change in the future. Despite that, since the business model itself is an old and tested one, the high risks are rewarded with high returns. Do your due diligence, and invest only funds that you can afford to, and you will be fine.