Bill discounting is any payment to be received by the seller on a future date for which the amount is already taken in advance from the financial institution.
What is Bill Discounting?
Bill or invoice discounting is a trading activity in which the seller gets the 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 the monthly fees.
For example, You have sold goods to Mr. X, he has given you a letter of credit from the bank of 30 days, if you want to get money from the bank before 30 days, the bank will charge some interest rate from you, which in return will be called as a 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 from the bank. The buyer will anyhow deposit Rs. 1 lakh to the respective bank on the 30th day only.
This trading or financial process is termed 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 a discount on the amount that is required to be paid at the end of the credit period.
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Bill Discounting Rate of Interest
The interest rate offered by financial institutions on bill discounting depends on factors that include business stability, financial history, business volume, business tenure, applicant’s credit score, or creditworthiness along with his/her financials.
Process of Bill/Invoice Discounting
- Invoices are being raised when the seller sells the goods on credit
- Accepting the invoice means, that the buyer has acknowledged paying the amount on the due date
- For discounting purposes, the seller approaches the financial institution
- As per the creditworthiness of the buyer and legitimacy of the bill, the bank or NBFC is assured
- Bank or NBFC disburses the fund to the seller post deducting the fee, discount, and appropriate margin which is already defined
- Furthermore, the seller receives the funds which can be used for other business purposes
Bill discounting or invoice discounting has always been considered as a beneficial financial instrument that has helped sellers in providing working capital finance.
Eligibility for Bill Discounting
The eligibility criteria for bill discounting shall vary from lender to lender and is defined by the respective financial institution offering loans.
Documents Required for Bill/Invoice Discounting
- Duly filled application form with passport-sized photographs
- Business PAN card and address proof
- Applicant’s Aadhar card
- Business Establishment Proof
- Last 12 months’ bank statement
- Bill of Exchange
- Letter of Credit
- Commercial Invoice
- Packing list with all the details
- Logistics details with delivery challan, if any
- Proof of certificates, registrations, licenses, and permits, if any
- Any other document required
Factors that affect the eligibility
- Business Vintage
- Nature or type of business
- Business Volume and Annual Turnover
- Financial Stability
- Repayment history and capability
- Business Positive Net worth or Profitability
- Credit rating of a business
- Previous loan defaults, if any
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Features and Benefits of Bill Discounting
1) Credit Evaluation
Before sanctioning any invoice or bill discounting, the bank will surely consider the reputation of the seller by checking the past repayment history, financial stability, and creditworthiness of the buyer as they do not want to be at risk if the buyer defaults to repay the amount.
2) Availability of Instant Cash
Instant cash is available at the disposal of enterprises or businesses that help to improve the momentum of the businesses; moreover, it provides the option to entrepreneurs to do business without funds. It works the similar way as bank overdraft but it is not the same, as the customer is required to pay interest on the used amount.
3) Banking Partner Preferred
A reputed bank is always the first preference before the bill discounting is offered to the buyer. This makes sure that the buyer’s bank (paying entity) is reliable and trustworthy. Agreement between reputable companies or banks is required for discounting purposes.
4) Bill Usage
Also known as the ‘Usance Period’, bill usage is a period in which a bill has to be valid within the date of time permitted by customers for the bill date and its payment. This time period can vary from 3 weeks to 3 months.
- Effortless withdrawals
- Flexible repayment tenure
- Strengthened cash flow
- Interest to be paid only on the used amount
- Easy authentication
- Quick processing with hassle-free documentation
In the bill discounting process, the interest amount is charged in advance by the bank from the buyers. Being it an agreement between buyer and seller, the bill amount is paid as per the end of the credit period.
Also Read: What is letter of credit with example?
Bill Discounting Vs. Business Loan
|Category||Bill Discounting||Business Loan|
|Interest Rate||Depends on financial stability and business volume||Depends on the applicant’s profile and business requirements|
|Purpose||Used for trading activities – mainly import/export||Used to meet daily business requirements & much more|
|Eligible Entities||Medium & Large enterprises with high net-worth and business volume with financial stability||Individuals, Startups, MSMEs, Private and public limited companies, many more types of companies|
|Loan Amount||Depends on the nature of trade||Max. up to Rs. 1 crore, may exceed|
|Repayment Tenure||From 12 months – 3 years||From 12 months – 5 years|
|Nature of loan||Short-term||Term loan, Working Capital Loan|
|Collateral||Required, submitted in form of bills or invoices||Not required for unsecured business loans|
|Credit Score||Checked by the lender (750 or above is considered good)||Not always checked|
|Annual Turnover||Defined by lender||Defined by lender|
|Sanctioned Limit||Used in small portions||Used as lump sum amount|
|Loan Disbursal Tenure||Instant, if loan approved||2-3 working days, sometimes even lesser depending upon the financial institution|
Leading Financial Institutions offering Bill/Invoice Discounting Facility
|SBI||South Indian Bank|
|ICICI Bank||Lendingkart Finance|
|TATA Capital||Indifi Finance|
|HDFC Bank||Central bank of India|
|Bajaj Finserv||Abhyudaya Co-operative Bank|
|Bank of Baroda||EFL Finance|
|IDBI Bank||Capital Float|
|Federal Bank||Hero Fincorp|
Ways of Presenting Invoice
Mainly there are two methods of presenting bills to the buyer’s bank, named as – with and without recourse. Let’s understand further about these two ways.
a) With Resource
in With Resource method, the seller’s bank verifies and checks all the documents and discount terms to further send them to the buyer’s bank. Then the bank does not re-check the rest of the things and can claim refunds later on if there is an issue.
b) Without Resource
Whereas, in the Without Resource method, no checks are performed by the seller’s bank at the time of request for payment, and the buyer’s bank performs the checks on all the important details. Mainly, this practice is followed when both banks have acceptance, tie-ups for payment, and negotiations from each other.
FAQs on Bill Discounting
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 as 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 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.