Benefits of ID for suppliers from the Automotive Industry

The automotive sector comprises lots of component manufacturers who try to meet the demands of the industry. The push for more eco-friendly vehicles in the market implies that component manufacturers have to invest in innovation and resources for mass production.

Given the competition in the sector, companies must ensure they maintain sufficient resources to help meet the demands. Invoice discounting helps automotive suppliers raise short-term funds immediately by selling their outstanding invoices at a discount.

Relevance of invoice discounting in the automotive industry

Invoice discounting has become a recognised source of short-term funds among businesses. Customers of automotive industries prefer favourable terms of credit on their invoices. Credit periods can go up to 3 months. An increase in production to match the demand for automotive equipment implies automotive manufacturers would have to cover more production costs, along with other expenses such as payroll, marketing, up gradation of facilities, etc.

This requirement of funds can clash with the extended credit periods offered to customers since payment delays of invoices from customers can also result in revenue loss. With the automotive industry becoming more competitive over time, companies cannot afford to forego any available opportunity. This is where invoice discounting can help automotive companies. Automotive companies can encash their accounts receivables through invoice discounting and utilise them to cover their costs. The invoices are discounted with a discounting entity, against which they receive advances. This is repaid once the invoice value is settled with the company.

Advantages of adopting invoice discounting for automotive companies

• Quick source of funds: Automotive companies need not wait for long periods to obtain funds from traditional sources when invoice discounting provides an easy and quick avenue to source short-term finances. 
• Free up funds: Invoice discounting helps companies utilise funds locked in receivables. This helps prevent cash-flow crunches and meet production and other operating costs.
• Fulfil orders more effectively: Amounts received via invoice discounting act as advances which companies can utilise to fulfil customer orders. This also enables companies to take up more orders.
• Capture growth opportunities: A company with enough working capital is better positioned to make the required investments to absorb customer demand and, thus, seize opportunities.
• Off-balance sheet item: Invoice discounting does not increase the debt obligations of a company. This allows companies to invest in new capacities without the additional burden of debt.

How can businesses in the automotive industry go for invoice discounting? 

Considering the above benefits, automotive players have started preferring invoice discounting as a source of finance. The automotive sector accounts for more than 10% of invoice discounting in India as per M1xchange, one of the 3 TReDS players. This is due to the faster rotation of funds to meet customer demands. 

Companies need to apply on invoice discounting platforms and can trade invoices once they are approved. Invoice discounting follows the process flow mentioned below:

1. Raise an early payment request from the enterprise.
2. This request can be submitted on the invoice discounting platform. 
3. Receive early payment in exchange for a small discount on the invoice amount.

Automotive companies in India can use the government’s initiative known as TReDS (Trade Receivables Discounting System). This system helps facilitate the encashment of receivables for the MSMEs. TReDS includes three platforms under the approval of the Reserve Bank of India – RXIL, Invoicemart and M1Xchange. With minimum procedures such as application on the platform, buyers’ credit rating checks, and digital submission of invoices, companies can easily raise funds through these platforms.

Availability of funds and liquidity will ultimately decide in the automotive industry, and invoice discounting is a tool that can be used to enforce that. It helps to bridge the gap between long credit periods and the requirement of funds to meet the demand of the automotive sector. One of the easiest ways to source short-term finances is that automotive companies can scale their business and keep up with the competitive industry.