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 or invoice discounting can perform at any bank or financial institution by the beneficiary of the bill. Let’s understand what is a bill discounting?
What is Bill Discounting?
As mentioned above, the term bill discounting refers to getting the amount of the bill or the invoice. It is by exchanging the same at a preferable or partner lender of the recipient of the invoice. But not at the full payment of the invoice. The banks charge a percentage of fees for such a benefit. So, it means that the bill has been discounted at a special rate.
The banks or money lenders earn a percentage of fees for such service given to the beneficiary. The beneficiary takes the dues of the bill instantly without having to abide till the end of the credit period. So, the invoices discounted under this method are known to be bills of exchange. This kind of loan is available to the recipient of the invoices. Thus, it has to be repaid if the bank or the moneylender does not realize the amount of the bill. It is when the amount is granted to the buyer at the time of maturity or the end of the credit period.
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 to serve them as you lack the resources and finance. Thus, A collateral-free and speedy 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.
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 requires 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 as per the end of the period. Concerning the agreed-upon document between the buyer and seller.
Learn from FAQs on Bill Discounting.
The various features of the bill discounting model are discussed below.
Evaluation of creditworthiness
The bankers or financial companies involved will look into the creditworthiness of the buyer and well as the authenticity of the seller before starting into the bill discounting transaction with both parties. This ensures that the risk of the bad debt or swindling is greatly reduced.
Preferred Banking Partner
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 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.
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.
- 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.
As per the contract between the seller and his/her bank or lender, the authority or responsibility to collect the dues from the buyer will lie with the seller or the banker as per the case may be. In case, the dues are managed by the seller, they have to be duly paid back to the seller’s bank upon receipt. This makes it essentially a type of credit that has to be repaid at the end of the loan period.
Understand the process of Bill Discounting from the case study.
The process to avail Bill Discounting
How Terkar Capital can help you?
Terkar Capital is a profoundly reputed financial consulting and advisory firm in India. We manage a hassle-free bill discounting facility without a mortgage! We simplify the entire process required in taking the funding to the client. Also, types of bill discounting, and so on so that the picture is clear at both ends.
Terkar Capital is the leading bill discounting company in India. So, if you are looking for a bill discounting facility, Terkar Capital is here for you!