Alternative to Invoice Discounting

In the wake of uncertain global times, 28% of small business owners have been facing major cash flow issues, and 43% of small business owners are searching for new financing solutions. 

This led many to invoice factoring and invoice discounting as a way to keep their businesses running through these tough times. The big thing is, this sector grew from $142 billion in 2020 to $147 billion in 2021 because most people resorted to invoice factoring and invoice discounting to finance and sustain businesses during these hard times. 

First, let’s understand what exactly is invoice discounting. 

What is Invoice Discounting?

Invoice discounting is a financial service in which a provider gives advance cash to a company against its outstanding invoices. The facility is useful to international suppliers who often have to sell under deferred invoice payment terms, sometimes as long as 120 days, affecting their finances. Most of the suppliers also fail to qualify for bank loans due to a short or poor credit history.

Suppliers can use their unpaid invoices as security in raising the required funds through invoice discounting. A lender will advance the money onto the supplier, taking the invoices as security. At the due date of the invoice, the buyer makes the payment and subsequently repays the amount borrowed to the lender, plus a service fee that is agreed on beforehand.

This method is not only about managing cash flows for the supplier, but it is also a means of financing, which is an alternative for those failing to attain the traditional bank lending criteria. The liquidity in a company through invoice discounting continues and runs smoothly despite delayed payments of invoices.

How does this work as an investment? 

At the moment, many finance apps are available. These applications act as an intermediary between small to medium-sized enterprise suppliers and retail investors for financing needs. For example, if a supplier has an invoice worth Rs 15 lakh, there could be roughly 100 small investors interested in investing small sums of money.

The amount is not big. Possibly ₹15,000 per individual, and when these hundred people join forces, they fund. In essence, these apps act as a link between the two extremes, leveraging technology as a tool. They assemble 100 individuals with an average of ₹15,000 and link them to a single invoice of 15 lakhs, which they are confident they will collect.

In addition, they also validate the creditworthiness of both the individual and the company by performing a credit check. This ensures that the individual is qualified for the credit. Thus, they conduct an additional layer of credit assessment, which the companies would have also carried out. 

These applications ensure that the invoices originate only from recognized large companies. They maintain a verified roster of companies they can serve. This brings a level of certainty to the funds returned to investors. These applications have filled a void in the market and are meeting a need.

However, invoice discounting might not always be the perfect solution for investors. The fees associated with this method and the reliance on customer payment timelines can sometimes be limiting factors.

Now, let’s explore some the best alternative investment to invoice discounting 

Alternative Investment to Invoice Discounting 

1. Peer-to-Peer (P2P) Lending

Peer-to-Peer (P2P) lending has quickly become a popular alternative investment, particularly for those looking to diversify their portfolios beyond conventional assets. This modern investment method enables investors to directly lend money to individuals or small businesses via online platforms, effectively cutting out traditional financial intermediaries such as banks.

Compared to invoice discounting, P2P lending platforms provide more flexibility with lending strategies. They offer both automated and manual lending options, giving you more control over your investment. Also, P2P lending platforms like LenDenClub are RBI-regulated making your transactions secure and safe. 

Platforms like LenDenClub, offers various lending options, like Lumpsum, Monthly Income Plan, and Manual lending.

Manual Lending

Manual lending within P2P platforms offers investors the opportunity to diversify their portfolio by selecting borrowers based on specific criteria. This hands-on approach allows investors to choose loan tenures that align with their financial goals, offering both short-term and long-term investment opportunities. Start your lending with Manual lending now. 

Lumpsum Plan

The Lumpsum Plan in P2P lending allows investors to make significant investments, ranging from ₹10,000 to ₹50 lakh, with tenures from one to six years. This option offers simple interest rates of up to 15%, with payouts occurring at the end of the lending period, making it ideal for those seeking medium to long-term returns.  Start lending now.

Lend once and earn big with Lumpsum. Start lending now.

2. Real estate 

Real estate is a solid alternative to invoice discounting due to its tangible nature. Real estate also gives you long-term appreciation. Unlike invoice discounting, which is tied to a company’s receivables, real estate is a physical asset that increases in value over time. Additionally, real estate gives you a strong hedge against inflation and gives you various tax benefits, that enhances overall returns. 

Real Estate Investment Trusts (REITs) offer an easy way to invest in real estate. Here  without the need to directly own or manage properties. REITs pool funds from multiple investors to manage income-generating real estate, like commercial buildings, apartments, or shopping centers. 

This allows investors to benefit from the rental income and potential property value appreciation, just like direct real estate ownership. Additionally, REITs provide liquidity, as they are traded on major stock exchanges, making it easier for investors to buy and sell shares compared to the traditional real estate market. With a lower entry cost and professional management, REITs offer a practical and diversified alternative to invoice discounting.

3. Stock Market

The stock market is a solid alternative to invoice discounting, you can high returns in very less time. One of the main advantages is liquidity—you can easily buy and sell shares, making it more flexible compared to investments invoice discounting. The stock market also gives a broad range of options, you can invest from established companies to emerging unicorns. You can align your investments with your financial goals. The stock market is a great option for diversifying your investment portfolio, offering prospects for both capital growth and dividends.

Are you planning to invest in the stock market? Check out this blog Best Monopoly Stocks in India 2024

4. Government Securities

Sovereign bonds, also known as government securities, are forms of debt that a government issues in order to generate funds for their spending. Compared to invoice discounting these financial instruments are low-risk investments. These investments have the financial backing of the government that issued them. They offer stable returns while safeguarding the initial capital. 

Government securities are a low-risk option and are suitable for conservative investors seeking a dependable income source. Government securities are offered in different forms such as Treasury bills, notes, and bonds and are certainly one of the most favored alternative investments in India.

5. Cryptocurrencies 

Cryptocurrencies like Bitcoin and Ethereum have become extremely popular. Compared to invoice discounting, cryptocurrencies can offer higher returns. Operating on decentralized blockchain technology, cryptocurrencies provide a way to hedge against inflation. However, they do come with high volatility and regulatory uncertainties, making them suitable for investors willing to take on significant risks. Nevertheless, their potential for high gains makes them an intriguing alternative to traditional assets such as mutual funds and bonds.

Factors to Consider

When evaluating alternative investment to invoice discounting, it’s essential to weigh several factors. Here are key considerations for each alternative:

1. Peer-to-Peer (P2P) Lending
   • Risk and Return: P2P lending offers high returns but comes with risks such as borrower defaults. Assess the credit risk associated with borrowers. 
   • Diversification: To mitigate risk, consider diversifying across multiple borrowers and loan types. Platforms like LenDenClub offer various lending options that cater to different investment strategies.
   • Liquidity: While P2P lending can provide attractive returns, consider the liquidity of your investment.
2. Real Estate
   • Market Trends: Real estate markets can vary significantly based on location. Research the local real estate market trends and choose properties or REITs in areas with strong growth potential.
   • Management: Direct real estate investments require active management, including maintenance. REITs offer a more hands-off approach but evaluate their management fees and performance history.
   • Capital and Costs: Real estate investments require big capital and come with additional costs like property taxes and insurance. Make sure these costs fit within your budget.
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3. Stock Market
   • Volatility: The stock market can be highly volatile, and while it offers high returns, it has its own risks. Stay informed about market trends and individual stock performance.
   • Diversification: To mitigate risk, diversify your portfolio across different sectors and asset classes. Avoid putting all your funds into a single stock or sector.