Bill discounting is any payment to be received by the seller in future date for which the amount is already taken in advance from the financial institution. Bill or invoice discounting is a trade activity in which the seller gets amount in advance at discounted rates from the lender. This makes buyers contribute in the form of interest rate in increasing the revenue of the financial institutions, banks or NBFCs in form of interest paid and from monthly fee.
For example: You have sold goods to Mr. X, he has given you letter of credit from bank of 30 days, if you want to get money from bank before 30 days, the bank will charge some interest rate from you, which in return will be called as discount for the seller. Let’s assume if the amount which you were supposed to get was Rs. 1 lakh on or after 30 days, by bank’s discount or interest rate of Rs. 50,000 you now get Rs. 95,000 in return form the bank. The buyer will anyhow deposit Rs. 1 lakh to the respective bank on 30th day only.
This trading or financial process is termed as bill discounting or invoice discounting.
Bills that come under bill discounting are termed as ‘bills of exchange’. Bill discounting feature can be used to avail loans up to approximately 90% of the raised invoices. The credit period majorly depends on the buyer’s creditworthiness. Once the bank is convinced, it provides discount on the amount that is required to be paid at the end of credit period.