Bill discounting or invoice discounting is a method of sourcing working capital from future payables. Furthermore, the bill of exchange to the financial institution recovers the number of sales before it gets matured.
Bill discounting is a major trade activity. It aids the company’s outstanding bills which are due to be paid at a future date are sold to a bank. It also helps the bank earn some income by charging a discount/fee. The bank takes it from a seller to issue funds before the credit period ends. When the due date of the credit period comes, the seller’s client pays the full amount to the Bank.
The discount on the bill of exchange is based on the remaining time to maturity and the amount involved. The buyer gets a credit period against the letter of credit and the seller gets his advance payment.
Bill Discounting Process:
- Invoices are being raised when the seller/ exporter sells the goods on credit to the buyer/ importer.
- Accepting the invoice means, that the buyer pays the entire amount as per the invoice to the seller on the due date.
- For discounting purposes, the seller addresses his bank with the accepted bill of exchange by the buyer to discount it.
- As per the creditworthiness of the buyer, the banks review the bill of exchange and assess the risk.
- Bank or NBFC dispenses the fund to the seller post deducting the fee.
- Furthermore, the seller gets the funds that can be used for business plans.
Bill discounting or invoice discounting has always been recognized as a beneficial financial instrument that has assisted sellers in providing working capital finance.
What are the Advantages of Bill Discounting?
Bill Discounting offers the following benefits:
- Bill discounting reduces the chances of bad debt.
- It facilitates the seller to improve the cash inflow and hence expanding deals, seeking after development, securing hardware, etc is possible.
- A low rate of interest/ fees as compared to other advanced facilities, therefore, beneficial for sellers.
- Bill of exchange is a negotiable/ tradable instrument. It can be further rediscounted and can be sold to other financial institutions.
- No collateral involved: There is no requirement to keep any asset as security as the outstanding invoice is considered as the collateral itself.
- The seller/ beneficiary has to interest on the used amount only unlike other business loans.
- Instant access to cash: It does not involve a lengthy documentation procedure.
- No debt incurred: Bill discounting supports in saving tax liability. The chances of a company undergoing any loss or damage are less.
- No impact on the balance sheet: Bill discounting does not affect the balance sheet of the business as it is an off-the-book process.
Eligibility for Bill Discounting
The eligibility criteria for bill discounting vary from bank to bank. The factors that affect eligibility:
- Business Vintage
- Business Volume and Annual Turnover
- Financial Stability
- Repayment history and capability
- Business Positive Net worth or Profitability
- Credit rating of the business
- Previous loan defaults, if any