Innovative Invoice Discounting Solution Aids MSMEs In Working Capital

Red Fort Capital Finance Company, an NBFC specialized in lending to small businesses, has introduced an invoice discounting solution aimed at assisting MSMEs in managing working capital gaps. The financial offering involves businesses selling their unpaid invoices to a third-party financier, like a bank, at a discounted rate, enabling swift access to working capital. Red Fort Capital's Chairman and CEO, Parry Singh, expressed the company's commitment to supporting small businesses in challenging environments and emphasized the flexibility and speed of their new Invoice Discounting solution.

“At Red Fort Capital, we are dedicated to fostering growth for our borrowers, especially in the challenging landscape faced by Small Businesses. With the launch of our Invoice Discounting solution, we aim to empower businesses by providing quick and flexible lending options tailored to their unique needs,” Singh said.

Sectors Eligible For Invoice Discounting

According to the NBFC, invoices ranging between INR 20 lakh to INR 1 crore (unsecured) and up to INR 3 crore (secured) are disbursed with up to 90 per cent of the invoice value in less than 24 hours. Documents required for MSMEs include invoices or purchase orders, top 10 customer details and yearly sales, bank statements for the last two years, monthly GST returns for the previous two years, KYC documents, audited financials, ITR returns for two years, sales ledger for the last year, and collateral sale deed for secured lending.

Red Fort Capital specifies that all sectors, excluding construction and education, are eligible for invoice discounting. Earlier this year, the NBFC secured term loans of INR 7.5 crore from IKF Finance and INR 4 crore from Usha Financial Services for MSMEs, focusing on secured business loans ranging from INR 1 crore to INR 10 crore.

What is Invoice Discounting?

Invoice discounting is a process where a business uses its unpaid invoices (accounts receivable) as collateral to get a loan from a financial institution. Instead of waiting for customers to pay their invoices, the business can receive a portion of the invoice amount upfront from the lender. The financial institution then collects the full payment from the customers when the invoices are due. This helps the business improve its cash flow by accessing funds tied up in unpaid invoices more quickly.

In the lending landscape, the Reserve Bank of India (RBI) recently increased risk weights for various lending categories, impacting both banks and NBFCs. Notably, the risk weight for NBFCs' credit card receivables was raised from 100 per cent to 125 per cent. While this move has raised concerns, the NBFC body FIDC has urged the central bank to reconsider, highlighting potential adverse effects on credit flow to crucial sectors like MSMEs and self-employed individuals that heavily rely on credit from NBFCs.

Conclusion

As businesses seek quicker access to working capital, invoice discounting aligns with a commitment to promoting growth and resilience. However, amidst regulatory changes, ongoing dialogue between financial bodies and regulators may shape the future landscape of credit access for crucial sectors like MSMEs, emphasizing the need for adaptive financial solutions.