Auto companies warm up to invoice discounting to boost suppliers’ cash flow

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The automotive industry in the country is increasingly adopting the concept of invoice discounting to access capital at a relatively lower rate of interest and improve cash flow of component suppliers amid the pandemic.

Under invoice discounting, a lender settles the claims of a supplier upon the receipt of goods by the buyer and the buyer then repays the lender after a pre-determined period.

It is facilitated through trade receivables discounting system (TReDS), an invoice discounting regime set up by the Reserve Bank of India in 2017 to improve the cash flows of micro, small and medium enterprises (MSMEs).

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M1Xchange, one of three TReDS players in the country, said it currently gets more than 10% of its volume from the automotive sector.

The platform is facilitating transactions of over Rs 1,000 crore a month, M1Xchange chief executive Sundeep Mohindru told ET. Business particularly picked up during the Covid-19 lockdowns, he said.

The Amazon-backed company has tied up with about 50 large automotive companies and their MSME suppliers that have routed about Rs 1,300 crore worth of business through M1Xchange in the last three years.

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The other two TReDS platforms in the country are RXIL and Invoicemart.

TReDS platforms work as marketplaces between lenders and sellers, with buyers authenticating the invoices.

There is no collateral involved, and lenders lend against the acknowledgement of the receipt by the buyer after considering the buyer’s credit rating. As a result, MSMEs get invoices discounted at an interest rate of 4.2-8%, depending on the buyer’s credit rating, which is much lower than the interest rate these companies typically pay on loans.

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“As the supplier’s financials are not considered for discounting, MSMEs can scale up their business without reference of their previous track record, thereby removing the financial limitation for growth,” Mohindru said.

Industry body Automotive Component Manufacturers Association of India (ACMA) president Deepak Jain said it was a “good sign” that invoice discounting was gaining traction. “When the customers also collaborate with the tier-1 and tier-2 suppliers to ensure that the working capital needs are met sufficiently, bill discounting will basically happen,” he said.

Shailesh Jain, director of G R Metalloys, a supplier to automotive companies like

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, Alicon Castalloy and Rockman Industries, said, “Using bill discounting, we can rotate our money very fast. Our business is very competitive, and if we rotate money fast, we can do more business.”

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