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