What is Invoice Discounting
Invoice discounting is an amount in form of payment received by the seller in future dates, wherein the amount is already taken from the bank or lender. Majorly used in the trading industry, it is a credit facility in which the seller gets the amount in advance at discounted rates from the bank. The amount borrowed from the lender is repaid in form of EMIs with added interest of the utilized amount.
- Interest rates and loan against invoice depends on the terms of transaction and business size and volume
- Bills that are used as invoices for this purpose are also known as Bills of Exchange
- Interest amount is charged in advance by the lender from the buyers
- Bills can be used to get loans up to 90% of the raised invoices from lender
- Credit period for this process depends on the buyer’s creditworthiness
- Availability of instant cash for borrowers at times of financial urgency
- These bills or invoices acts as bank overdraft, as interest is levied upon only utilized loan amount
- Bill’s validity needs to be at least from 3 weeks to 3 months
- Invoices can be presented in two forms, With Resourse and Without Resource. With Resource is when seller’s bank verifies and checks all the documents and terms and Without Resources goes with no checks
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Process of Invoice Discounting
- Seller sells the goods/products on credit to buyer
- Seller raises the invoice for the sold goods with the buyer
- Buyer further accepts the invoice sent by seller and acknowledges paying the amount on the due date
- Seller reaches for a bank or financing company to further discount the invoices
- Bank guarantees itself of the legality of the invoices and buyer’s creditworthiness
- Bank disburses the fund to the seller after deducting appropriate interest, margin, discount and fee
- Seller gets the funds and further uses it for his/her business
For Example: You have sold goods to Mr. Singh, Mr. Singh has given you letter of credit from ABC bank of 30 days, if you want to get money from ABC bank before 30 days, the bank will charge some interest rate from you, which in return will be called as discount for the seller.
Now let’s assume, if the amount which you were supposed to get was Rs. 1 lakh on or after 30 days, by ABC 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.
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Documents Required for Invoice Discounting
- Passport-sized photographs
- Business Plan
- KYC documents of the applicant(s)
- Business address and vintage proof
- Income proof along with last 2 years’ ITR, GST and Sales tax returns
- Copies of all the registrations, certificates and licenses
- Last 6 months’ bank statements
- Detailed information on required discounting
- Business financials – audited by CA
Also Read: Documents Required for Business Loan
Invoice Discounting Advantages and Disadvantages
- Availability of fast cash
- Interest is charged only on utilised cash
- Short-term loan with flexible repayment option
- No collateral required – Unsecured business loan
- Lowers the profit
- Higher interest rate
- Availed only on commercial invoices
- Limited industry sectors involved
- Lesser repayment tenure
Top Banks/NBFCs offering Bill/Invoice Discounting
- HDFC Bank
- ICICI Bank
- Bajaj Finserv
- Lendingkart Finance
- Indifi Finance
- Hero Fincorp
- Axis Bank
- Bank of Baroda
- Canara Bank
- TATA Capital
- IDBI Bank
- Federal Bank
- South Indian Bank
- Central bank of India
- Abhyudaya Co-operative Bank
- EFL Finance
- Capital Float
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Invoice Discounting is also termed as Bill Discounting, Supply Chain Finance, Invoice Factoring, Loan Against Invoice, Invoice Financing, etc. by banking or financial institutions in India.
FAQs on Invoice Discounting
Q1. What is the difference between Invoice Discounting and Invoice Factoring?
Ans. Invoice discounting is a credit feature in which the funding is raised from the submitted invoices or bills. Whereas, in case of invoice factoring an enterprise sells its accounts receivable to a third party at a discount.
Q2. How do you account for invoice discounting?
Ans. Invoice discounting is a process in which a third party/buyer and bank is involved in providing funding to the seller.
Q3. What is confidential invoice discounting?
Ans. Confidential invoice discounting is a financial feature in which customers and suppliers are not aware that the business is being advanced capital against sales invoices before the payment is received.
Q4. How long does it take to avail funds through invoice discounting?
Ans. It depends on the business volume and bank or lender regarding the disbursal of loan amount. Generally, it takes around 7-10 working days in the whole process.