Overview
Bill discounting is a widely general practice in the business world. It enables the business to get immediate release of funds. Even though the credit period for the bills or the due date for the payment of the bills or the invoices is later. Thus, Bill discounting can perform at any bank or financial institution by the beneficiary of the bill. Let’s understand what is bill discounting.
What is Bill Discounting?
Bill discounting involves obtaining the amount of a bill or invoice by exchanging it with a preferred or partner lender of the invoice recipient, without receiving the full payment. The lender charges a percentage of fees for providing this service, resulting in the bill being discounted at a special rate.
Banks or money lenders earn a percentage of fees by offering this service. This enables the beneficiary to receive the bill’s dues immediately, rather than waiting until the end of the credit period. The discounted invoices in this process are considered bills of exchange. Recipients of the invoices have access to this type of loan, however, it must be repaid if the bank or money lender fails to collect the bill amount from the buyer at the time of maturity or the end of the credit period.
Importance
When a buyer buys assets or goods from the seller, the amount is usually made through a letter of credit. The credit time may vary from 30 days to 120 days. Depending upon the creditworthiness of the buyer, the bank discounts the amount that is required to be paid at the end of the credit period. Bill Discounting is also known as Invoice Discounting.
It means that the bank will charge the interest amount during the credit period as an advance from the buyer’s account. After that, the bill amount is paid at the end of the period. So, concerning the agreed-upon document between the buyer and seller.
Features
The bankers or financial companies involved will look into the creditworthiness of the buyer as well as the authenticity of the seller before starting into the bill discounting transaction with both parties. This ensures that the risk of bad debt or swindling is greatly reduced.
The banking parties concerned in bill discounting transactions are ordinarily bigger, reputed, and recognized names in the banking industry. This assures the feasibility of the transaction at the time of maturity of the invoice. Or the authenticity of the paying party.
Also, a bank prefers the buyer to have a long reputation relationship. Because this assures the creditworthiness of the buyer.
The bill discounting model includes interbank dealings. The discounting terms have been explained and agreed upon by the buyer and seller’s bank without their direct involvement.
The term of validity within the date of time sanctioned by customs for the bill date and the payment date existence is ordinarily known as the usance period. It means that the bill has to be viable at the period of maturity or payment time.
Methods
In this method, the examination of all the documents is on the seller’s bank. After a thorough investigation, they send the same for checking to the buyer’s bank. Here, the seller or the seller’s bank is responsible for any mishap in the whole process.
This method is contrary to the previous one. Thus, the buyer’s bank examines the documents and raises a bill against the seller. The buyer here will be held responsible for any default in the process of bill discounting.
Procedure
The practice of bill discounting is very general in the business world. It is part of the day-to-day exercises or transactions in any business organization. Therefore, the process is simple and fast to ensure the immediate release of funds to the seller without any additional delays.
The steps involved in the bill discounting process are described below:
- Seller and buyer access into a contract for the sale of goods or services.
- The seller increases the invoice upon the buyer for the goods sold.
- The buyer accepts the invoice raised. It involves the acceptance of payment of the dues declared in the invoice.
- The seller will later approach the partner bank or lender for bill discounting.
- The lender upon confirming the authenticity of the transaction and the creditworthiness of the buyer will issue the funds to the seller. After subtracting the agreed margin, fees, and discount.
- At the period of maturity of the bill, the lender or the seller’s bank will appropriately present the bill and collect the dues from the buyer.
According to the agreement between the seller and their bank or lender, the seller or the banker, depending on the situation, holds the responsibility to collect the payments from the buyer. If the seller manages the payments, they must promptly reimburse their bank. Therefore, this arrangement essentially involves a form of credit that needs to be repaid at the end of the loan term.
Understand the Bill Discounting process from the case study.
Why Bill Discounting?
It is a good fit for your working capital finance requirements. If you are facing these issues, you have fatigued. Or are unable to obtain credit limits from banks. It is due to a lack of security or tedious processes. Your buyers are asking for a longer credit period. But consenting to this means you’ll face a cash crisis. And more leads for export orders lined up. But you are incapable of serving them as you lack the resources and finances.
Thus, A speedy and collateral-free working capital solution like Bill Discounting can be a big supporter in growing your export business’s sales. As it fuels cash flow which is the lifeline of any expanding export business.
The process to avail Bill Discounting
How Terkar Capital can help you?
Terkar Capital offers collateral-free loans to MSMEs through bill discounting. This practice allows businesses to receive immediate funds by exchanging invoices at a preferred lender. Bill discounting helps overcome challenges such as obtaining credit limits, longer credit periods requested by buyers, and the lack of resources for fulfilling export orders.
The bill discounting process is simple and fast, ensuring prompt release of funds to the seller while allowing repayment at the end of the loan period.
FAQs on Bill Discounting
1. Is Bill discounting a type of loan?
It is a type of invoice financing where the borrower gets the loan against unpaid bills. Thus, In simple words, they are short-term business loans.
2. How is the interest calculated?
The interest calculation is as per the terms of the lending bank or financial institution. It considers the credit period or the tenure of the bill. That may be 30 days, 60 days, 90 days, etc. as the case may be.
3. Who provides Bill discounting services?
Generally, banks provide this service. But nowadays NBFCs or Financial Institutions also offer these services. It is a convenient process. Because documentation is less and eligibility criteria depend on the creditworthiness of the borrower with the bank as well as the credit score of the debtor.
4. What is the repayment period?
The repayment period is the credit period decided as per the agreement between the parties, the buyer and seller. The period of the bill will get over on the maturity date or repayment of money against the bill, whichever is earlier.
5. What are the advantages of Bill Discounting?
It is a fast and convenient process. Also, this financial instrument makes immediate availability of funds to the seller, which does not stop his operations of the business.
6. Is CIBIL score important?
Traditionally, financial instruments are used to come up with some sort of securities. But today they even availed themselves without security. If bill discounting is availed through an unsecured way, CIBIL and the relationship with the banker are primarily checked.
Nice Informative article,well done.
Thank you so much for the words. We really appreciate!!