Alternative Investment Tools - Invoice Discounting

Alternative Investment – Invoice Discounting (Introduction) – When it comes to alternative investment the first flashes in our minds are metals, commodities etc. but this concept I think is old and broad. Investment is much older than modern traditional investments in stock markets and its other dimensions. Metals and commodities are the most popular modes of alternative investment but they are not the only options. There are alternatives to traditional and popular forms of alternative investment and if done with proper analysis it is much safer and ensures higher guaranteed returns and that too in short term and midterm (in some cases for long term also). Now what is Invoice discounting? For example, Mr. X runs a glass bottle manufacturing business in the domestic market of his city and one day a representative from Pepsi paid a visit to him. He asked him to supply 10,00,000 bottles for Pepsi after 3 months but he refused to pay any advance money. To validate this contract on monetary terms he agreed to issue an invoice of complete payment on delivery of consignment after 3 months. Mr. X made the following financial analysis of this contract – Selling price or money he is receiving on every bottle – 5 Cost if manufacturing every bottle – 3.5 Net profit per bottle – 5-3.5 = 1.5 rupee Overall profit on consignment – 1.5 * 1000000 = 1,500,000 INR (Indian National Rupees) But Mr. X required money right now for material, labor etc. to complete this order and since this order is big and he is a small manufacturer with low credit history he has no traditional mode of financing available up his sleeve like – Banks, NBFCs etc. Then he went to Mr. Y who is a domestic level financer who finances small and medium level unorganized business men. Mr. X offers him to take the invoice of rupees 5,000,000 from him right now and provide him 4,500,000 cash instantly and cash the invoice after 3 months. After analysing the below mentioned attributes – · Pepsi being a big company holds substantial creditworthiness in the market. · The past track record of on time and quality delivery of bottles by Mr.X in the market. · Other legal aspects related to the invoice. Mr. Y accepts the invoice and provides Mr. X with the desired money. When Mr. Y utilized the invoice on completion of time, he received the full amount and his return of investment war – 500000/4500000 = 0.11% in one quarter. This is how the invoice discounting works. In my other posts I will elaborate the analysis of invoice discounting and the parameters on which the decision of acceptance or rejection of invoice depends. If someone wants to take my online training classes for CFA/MBA-Finance or a special training course on financial/economic/market research and analysis can email me on mohitfin6@gmail.com. Self-created and own work of Mohit Pandey #alternativeinvestments #creditmanagement #creditrisk #creditratings #credit #financing #invoicediscounting #invoicemanagement #financialanalysis #creditanalysis #creditanalyst Mylinkedin profile - https://www.linkedin.com/in/mohit-pandey-b9254434/