What is Invoice Discounting? | Low Risk High Return Investments | CA Rachana Ranade

What is Invoice Discounting? | Low Risk High Return Investments | CA Rachana Ranade

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Hey folks CA Rachana Ranade here and i welcome  you all to a super interesting video which is   going to be about an investment option wherein  the risk is low but the return is high and i'm   sure you might be like 'asa kasa kaay?' let me remind you all one more time that   all these creative people are spammers that's  how my account looks like also remember i never   give my mobile number in any chat i neither  have an advisory nor do i give any stock tips and i'm sure you all are super excited  to know which investment avenue is this   and that investment avenue is known as an invoice  discounting so for you all to understand the base   meaning of invoices counting invoice discounting  is a method of financing used by small businesses   to fulfill their working capital requirement and  i'm sure you have understood nothing right so as   usual let's try and get a simplified example of  what is an invoice discounting and how does it   work right so for that let's take an example of  let us say itc and what is the main product of   itc not that product of itc i'm talking about  biscuits okay focus okay so assume that itc   which makes biscuits i'm sure everyone might  have heard about sunfeast right so for making   these biscuits what is the base raw material that  they require it's floor in marathi we call that as okay our supply itc supplier okay so now  what is going to happen let's understand   a base transaction right itc requires a raw  material which is maida which is supplied by   whom mr chandus company or mr chandus partnership  home okay so now what is going to happen chandu is   going to supply what maida and in return he is  getting nothing look at the face of chandu he's   sad why or a itc is telling chandu that goody have  supplied us the raw material but we are going to   pay you after 60 days okay of course in real life  these payment terms and everything is discussed   before the deal is correct okay it doesn't come  as a surprise okay so now chandu is a little   bit worried why can he tell his employees that  you will get your salary once itc pays me money   he can't stop his employees salary right i'm sure  chandu might have to pay some of his suppliers as   well are they going to wait till itc pays him  the money no so chandu is in a fix in a problem   because good that he has got such an amazing  customer but the problem is that he is falling   short of money right now the problem is  liquidity crunch for chandu right now okay   now chandu is in search of a person or an entity  who can immediately give him funds okay now who   could that entity be could be an hni a high  net worth individual or it could be a company   or it could be a bank or any organization okay  in our example let's take it's a bank okay   now what will happen let's understand chandra  goes into this bank and what does chandu say   now understand certain figures okay chando says  that okay i have this bill okay bill from itc   where itc is going to pay me five lakh rupees okay  when is itc going to pay me five lakh rupees after   60 days okay now the bank says if we pay you 5x  immediately what is what is our profit we also   need some profit in this entire transaction so  bank says i will give you money right away but i   am going to give only 4 lakh 90 000 rupees okay in  simple words can i say bank charged something like   a commission of how much two percent for those  who are mathematically challenged people you can   take out a calculator and you can calculate five  lakh into two percent that is ten thousand so   how much is going to how much money is the bank  going to pay chandu four lakh ninety thousand   okay now let's understand what happened in  this after two months so let's fast forward so   by the way today did chandu get the entire  money yes what will happen after two months   money will be received by whom money will be  received by the bank who will pay the money   this entity which is itc is going to pay money to  the bank directly okay so that is how the entire   transaction will be completed as of now who was  happy it was itc was happy why they got by the end   time they do not have to pay right now they have  to pay after two months chandu is also happy right   now see look at his face why is he happy or he  got money immediately now he can pay his employees   and his suppliers and bank even if you can't see  the face of the bank see the sparkles and shines   around the bank bank is also happy why they got an  opportunity to earn two percent interest in just a   span of 60 days right that's an annualized return  of almost 12 percent but there is only one person   who is very unhappy right now who's that that's  me why because you look at all my videos but you   never smash that like button 'hana te like button'  okay just take that count to more than one lakh So i hope you have understood the concept of  invoice discounting very nicely with the help   of an example just to break it down further why  invoice discounting because there was an invoice   who had that chandu right and it was discounted  okay discounted with whom with that bank in our   example right and why the word discounting because  if you remember chandu got two percent less right   but what was the advantage to him the advantage  was that he got the liquidity immediately and   that is the reason why it was as good as the  investor investing in what investing in the   invoice okay now with that as a base what is the  problem let's understand why only banks get an   opportunity why only big corporate so only big h  is get an opportunity to invest in these invoices   why not people like you and me now the problem  is that there are a lot of suppliers who need   money for their working capital requirement  and there are a lot of individual investors   people like you and me who are ready to  invest maybe but there is no connection   there is no bridge wherein we can identify these  people and these people can identify us right   amazing bridge has been created by whom by trade  credit so what is trade trade credit trade card   is an online platform for deploying private  capital private capital means whose capital   retail individual investors capital to invoices  to the curated invoices of all these people right   trade credit was founded by Mr Hardik Shah who  is also a Chartered Accountant and who is also   CFA and he is having eight years experience  in the field of financial services industry   and trade grade right now the one the organization  that he had founded trade card right now is   India's largest alternative debt platform in  fact trade credit was also the first startup   which got incubation support from CA  institute if you remember inaudible that BKC office was also given by ICAI to  TradeCred uh for you know using it for one   year you can imagine imagine that that's also  a very nice support extended by ICAI right so i   hope you have understood that now the problem  of that bridge is solved by trade credit but   now the only question remains is that if i were  to invest what is the actual process right from   account opening to investment and that's what we  are going to discuss in the next part of the video well now let's understand people like you me  retail individual investors basically how can we   invest in the various invoices through the trade  cred platform right so here you can see i am on   trade credit.com first of all what you have to  do is just click that investor tab drop down and   you have to click register now once you click here  you will see that there are a lot of options here   right from individual to HUF to partnership from  LLP or private limited company NBFC publisher   company bank NRI as well so uh if you are asking  about again people like you and me ideally it will   be the individual option which will be chosen  first right so i'm clicking on individual here   what you have to do you have to fill in basic  details like pan you'll have to mention your   email id your Aadhaar registered mobile number  also needs to be filled in right one important   point is that if you are an NRI then you will have  to ensure that your NRO account is being used for   deposits and withdrawals right so once you fill  up the basic KYC details on this platform then   what will happen is that you will get an email  right the email which you have mentioned in this   uh in the in the registration process you will  get an email and you're in the welcome email   which you will get ideally within 24 to 48 hours  of completing your KYC in this welcome email you   will also get your escrow account details right  so once you get this then again you have to go on   by.treadcred.com website and here when you click  on login you will have to enter your pan which   will be nothing but your username right so  once you enter your pan then you will have   to enter your password basically password you  have to put your mobile number again the mobile   number which is linked with your Aadhaar account  right and if when you enter your mobile number   and OTP will be you know generated and you  will get that OTP on your registered mobile   number so once that happens then you will  basically land up on this page because now   you are logged in to trade credit portal and  you are here on which section the section is of   current deals right once you go into the current  deal section you can see that deposit wallet tab   right just click on deposit you can enter whatever  amount you want to enter it could be 50 000 it   could be one lakh whatever one important point now  this platform has also enabled deposits via UPI   right so once you have deposited the amount now  you can choose which invoice you want to invest   in now here on the screen you can see company  names like Coca-Cola amazon now in our example   which was the company it was ITC now instead  of ITC now you can imagine that a seller has   supplied something to amazon and now can i say  like the bank had some sort of trust that yes ITC   will not default similarly of course people like  you and me have some sort of trust that amazon   Coca-Cola they might not default right so assume  after doing some sort of due diligence i'm going   to talk about that you decide that okay i'm going  to invest in this invoice which is of amazon right   so now what you can do is just enter the amount so  right now in this case minimum amount you can also   see very clearly it mentions minimum amount is 50  000 rupees what is the deal duration it's 95 days   in our example it was 60 days here deal duration  is 95 days and what is the net IRR it is 11.55   percent right so here you'll have to enter 50 000  and just hit on buy deal once you do that assuming   everything goes i mean right if you have money  in your account properly credited then you can   go to the dashboard and here you can see yes this  is the amount invested this is the current value   this is the net gain now you can be like a b bike  yeah how come there is again that will not happen   overnight of course these are some different  recordings as well so you can imagine after   10 days 20 days whatever your current value will  keep on increasing for those who are from commerce   background you'll understand this is like a cruel  method okay every day whatever interest is there   that will keep on getting added to your current  value and that is why you'll get to see the net   gain on your dashboard screen right now once you  get to see all these things now what you can do   is you can also go to the order history tab here  in the order history tab you can see again all   the details of your deal you can also go and cross  check here after that one very important point i   believe is that you can go to the add users tab  and in add users super important you can also   have you can also uh you know add a nominee to  this account i think this is the best part of   that you can also add nominee at such an amazing  ease in addition to that if you want you can also   go to the help and support section when you have  loads of FAQs on their uh on their tabs so you   can just go through all these questions and get  all your uh queries resolved right one last point   going back to the amazon deal again i'm again  on current deals here you can see something like   read deal summary so if you click on that you  can read the deal summary which talks about just   the base points of the summer of the deal you  can also click on read deal report i think this   is very important to read this talks about all  the details about the deal and also you can read   the risk acknowledgement pdf once you have done  all your homework and you feel that yes i can take   that much risk then i think this can be  an amazing way to diversify your portfolio now that you have understood the entire process  as well let's go ahead with certain advantages and   risks that are involved in this entire process  right the very first advantage we are going to   talk about the seller or the vendor first very  first one who was the seller in our example it was   chandu what was the biggest advantage for him it  was liquidity right he got the money instantly and   that is where the second advantage comes up that  is nothing but reduction in the overall operating   cycle time right one more advantage for a person  who is a seller like chandu is that no collateral   is required so for example if chandu was in need  of funds and had he gone to the bank i need a   working capital loan ideally bank would have asked  for certain collateral like it could be a stock it   could be debtors uh balances right so here in in  our example there is no other collateral required   to be uh you know like banks would ask for so  these are the advantages for whom for the seller   now what are the advantages for a buyer for an  investor people like you and me number one is this   an investment for a short term or a long term it's  a short term investment avenue so if you remember   chandus example it was 60 days uh or whatever 90  days even i gave you examples of amazon which was   shown on the website right that was also barely  60 days or 90 days right so with all these things   whenever i'm talking about short term till date  i've only discussed about saving account RD   account everyday on our channel this is the first  time i'm talking about any other short-term avenue   which has a potential to give you higher returns  and that is why that's where we open right low   risk high returns right so that is the biggest  advantage to a buyer good uh returns higher   returns in a short period of time number three  it's a stable investment why because like in a   stock market the value goes up and down daily is  that is your value in this invoice going to go   down daily nothing like that okay so comparatively  stable as compared to the stock market as well   diversification yes because if you want you can  invest in multiple invoices as well and plus if   you're talking about your portfolio level you you  get a chance to diversify from stocks or it could   be FDs mutual funds this this is a nice way to  diversify your portfolio and of course because   of trade credit platform one last advantage for us  is that easy accessibility if you remember earlier   when trade credit was not there how could i have  found out a person who's in need of funds right   so i think that's that's a pretty good advantage  for investors now let's come to the risks part   because right now you might have gotten a feeling  like everything is amazing let's start investing   so in that you need to understand that yes  there are certain risks also involved what   are the risks for people like you and me who are  investors or buyers the number one risk is that   there could be a default risk now what  could be a default risk in our example   ITC if says i'm not going to pay you chandu your  maida quality floor quality was not up to the mark   we are not going to pay you money so could that  have led to a default from a big brand like ITC as   well yes so is that a risk for an investor who is  investing in the invoice of ITC yes but for that   trade credit has certain risk mitigation tools  wherein they take 1.5 x to 2x of the cash flows  

uh which are involved in the invoice so  in simple words they create a nice cushion   for whatever is the invest for whatever is the  invoice amount right second risk could be a delay   in payment so for example assume that the days the  number of days involved were only 60 days but you   get it after 65 days you get it after 70 days  what is that that's a delay in payment for that   trade credit ensures that whatever is the delay  they're going to ensure that you get interest   even for that delayed payment okay so for example  if the payment gets delayed by 10 days you will   get an interest for additional 10 days and that is  ensured by trade credit one last one is fraudulent   invoices assume that a fraudulent invoice is  uploaded on their platform in simple words   the there is no party which is going to pay  the invoice itself was fake for that do you   think ideally trade credit platform should have  some risk mitigation process and answer is yes   in fact this team of trade credit was is under  the guidance of amazing people like Mr Hari Mundra   who is an independent director at ICICI bank and  also Mr Naveen Vora who is the national head of   transaction advisory at Ernst and Young both these  have been early investors with TradeCred and under   their mentorship you can say that uh that is  how the organization trade credit has been built   and that is how trade credit they believe that  they have developed a very strong credit policy   wherein they have tried to ensure that there  are no loopholes in the entire process right   but then what is an additional risk mitigation  process that TradeCreduses number one trade   credit people mention that they work only  with reputed brands like amazon Coca-Cola,   ITC other Aditya Birla group, Bisleri and few more  right number two TradeCred people ensure that they   have themselves verified the invoice before they  upload it on their platform in simple words they   try to ensure that no fraudulent invoice is  uploaded on the platform number three point   is that whatever money is received in our example  ITC whatever money is received from ITC that will   that will be kept in a separate escrow account and  this escrow account TradeCred has with ICICI bank   they also have a dual recourse mechanism now  what do we mean by that in our example if if uh   ITC was not in a position to repay then they  could have taken the money from chandu okay   so that is known as dual recourse mechanism  either the party pays if not chandu in our   example would pay the money to us so that's  that's again a good risk mitigation process   by the way all these points that we talked  about were from the viewpoint of TradeCred   they say that we are maintaining good credibility  we are ensuring that there are z i mean low or no   defaults in fact trade credit has mentioned that  they have ensured that they have zero defaults   till date whatever we discussed was from the angle  of TradeCred but for a person like you and me   can we also take up certain risk mitigation  processes answer is obviously yes   before you invest in any invoice i think a very  important point is that you should analyze the   deal you should analyze who the person is what  is the underlying transaction that has happened   do a base due diligence and then only take a final  decision of whether you are going to invest or not well moving on to the final but important  point what about the taxation part   number one is TradeCred going to deduct  any tax at source answer is no so basically   no TDS will be done by TradeCred number one  number two whatever interest income you're   going to get is that taxable answer is obviously  yes under which head under the head of income from   other sources and at what rate it will be taxed at  whatever is your tax lab so for example a person   might be taxed at 10 percent if he's in the 10%  slab or 30% if he's into the 30% tax lab right   so with this i hope you have understood a  lot about the concept of invoice discounting   i hope you have understood the fact that yes this  is an investment opportunity which is short-term   investment opportunity but also simultaneously  gives you an opportunity to earn higher rate of   interest one more point we discuss that yes this  is comparatively a stable investment option as   compared to stock market we did talk about how  you can invest through the TradeCred platform   in a very easy simplified manner by the way don't  forget to check out the link in the description   box wherein you can surely check out their amazing  online platform which is tradecred.com right   i hope you have enjoyed this video don't forget  to share it with maximum friends of yours   and if you want to know more about budget 2022  you can click here if you want to know about   the experts view on budget 2022 you can click  here till then take care Jai Hind and bye bye

2022-02-06 23:56

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