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.
What is Bill Discounting?
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.
Features and Benefits of Bill Discounting
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.
Availability of Instant Cash
Instant cash is available at disposal for enterprises or businesses that helps 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.
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 purpose.
Also known as ‘Usance Period’, bill usage is a period in which 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 used amount
- Easy authentication
- Quick processing with hassle free documentation
In 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 credit period.
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.
in With Resource method, the seller’s bank verifies and checks all the documents and discount terms to further send it to the buyer’s bank. Then the bank do not re-check the rest of the things and can claim refunds later on, if there is any issue.
Whereas, in Without Resource method, no checks are performed by the seller’s bank at the time of request for payment and 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.
Process of Invoice Discounting
- Invoices are being raised when the seller sells the goods on credit
- Accepting the invoice means, that the buyer has acknowledged on paying the amount on due date
- For discounting purposes, 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.
Leading Financial Institutions offering Bill/Invoice Discounting Facility
Bank of Baroda
South Indian Bank
Central bank of India
Abhyudaya Co-operative Bank