Bill Discounting (Invoice Discounting)

Bill Discounting is short-term finance for traders wherein they can sell unpaid invoices, due on a future date, to financial institutions in lieu of a commission. The Bank purchases the bill (Promissory Note) before its due date and credits the bill’s value after a discount charge to the customer’s account.  The Bank will realise the bill amount on the bill’s due date directly from the debtor. This helps the traders optimise their cash flows and business (payment) cycles without disturbing their balance sheets. Lenders usually offer tenors of up to 180 days while offering bill discounting facilities.

Example:

Let’s assume, a business owner sells goods to Mr. X worth Rs. 20,000 on credit but Mr. X agrees to pay after two months of purchase. However, the business owner is in urgent need of funds and can’t wait for two months. Therefore, a business owner can discount the bill with the bank for two months before its due date. For example, if the same trader discounts his bill(s) with a bank offering a discount rate of 12% p.a., then he would receive Rs. 19,600 after paying a commission of Rs. 400 to the bank.

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Bill Discounting Process

Below described are the steps involved in the process of Bill Discounting:

• MSMEs, as well as supply chain finance entities, raise invoices against larger corporates for the goods supplied or services offered.
• To monetise their unpaid bills, enterprises can bring their invoices for invoice discounting to lenders
• Within a few working days, the submitted invoices are converted into cash and transferred to MSMEs at discounted rates
• SMEs complete multiple business cycles in this tenure upon the release of payment from corporates

Factors affecting the Discount Rates

The discount rates offered by lenders on bill discounting shall depend on various factors, such as financial history, business tenure, business stability, business volume, applicant’s credit score, and creditworthiness.

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Eligibility Criteria 

Banks and other financial institutions may demand any of the following:

• Documented contract and the payment agreement from both the company and the customer should be agreed upon
• Purchase order, in response to the sales order, by the concerned customer, is required
• An invoice raised by the customer for the pending payment is also required
• As promised by the customers, there should be a Fixed date should be decided for the outstanding payment

Advantages of Bill Discounting

Benefits to Vendors under Bill Discounting

• Helps in improving working capital and cash flows without disturbing the balance sheet
• Low or NIL security/Guarantee
• Quick and convenient access to credit
• Higher loan amount as the margin requirement shall be much lower than the other alternative credit facilities

Benefits to Purchasers under Bill Discounting

• Improved price negotiation with vendors or suppliers
• Optimises supply of raw materials
• Relationship with value chain partners get strengthens

Leading Financial Institutions offering Bill/Invoice Discounting Facility

FAQs

Q. What is Bill financing?

Ans. Bill financing is a term used when an enterprise uses its invoices to obtain cash from a bank in order to purchase supplies and goods for the business. Bill financing is also termed Bill discounting or Invoice discounting.

Q. Can NBFCs offer bill discounting facilities?

Ans. Yes, NBFCs are eligible to offer bill discounting services to their customers. However, the interest rate shall vary and shall depend on the nature of the business and business volume.

Q. Is bill discounting a type of business loan?

Ans. Yes, it is one of the types of business loans offered by financial institutions like banks and NBFCs. In this type of business loan, the amount is sanctioned on the basis of bills or invoices shared with the lender.

Q. What is Invoice Discounting?

Ans. Invoice discounting or bill discounting are termed as the same type of business loan in which loan amount is sanctioned against the raised bills or invoices.