Bill Discounting/Invoice Discounting

With bill discounting, traders can obtain short-term financing by offering to buy unpaid invoices with future due dates to financial institutions in exchange for a commission. Prior to its due date, the Bank purchases the bill (Promissory Note) and credits the customer's account with the bill's value less a discount charge. On the due date for the bill, the Bank will receive payment in full from the debtor. Without affecting their balance sheets, this enables the traders to optimise their cash flows and business (payment) cycles. The tenors that lenders typically offer while providing bill discounting services range up to 180 days.

Example:

Let's say a business owner gives Mr. X credit to buy items worth Rs. 20,000, but Mr. X pledges to pay the money back in two months. But the business owner can't wait two months because he needs money now. As a result, the bank will discount the invoice for two months before it is due. For instance, the same trader would receive Rs. 19,600 after paying a commission of Rs. 400 to the bank if he discounts his bill(s) with a bank offering a discount rate of 12% p.a.

The steps involved in the bill discounting procedure are detailed below:

• MSMEs send bills for the items or services provided to larger corporations, as well as supply chain financing organisations.
• Businesses can submit their invoices for invoice discounting to lenders in order to turn their unpaid bills into cash.
• The submitted invoices are converted into cash and transferred to MSMEs at discounted rates within a few working days.

Influences on the Discount Rates

The discount rates for bill discounting that lenders offer depend on a number of variables, including your creditworthiness, financial history, business volume, and metrics like business duration, stability, and volume.

Eligibility Criteria

Any of the following may be required by banks and other financial institutions:

• Both the business and the client should agree to a written contract and a payment schedule.
• The concerned consumer must provide a purchase order in response to the sales order.
• An invoice raised by the customer for the pending payment is also required
• A fixed date should be selected for the unpaid balance, as guaranteed to the clients.

Advantages of Bill Discounting

Benefits of Bill Discounting for Vendors

• enhances cash flow and working capital without affecting the balance sheet.
• Low or no guarantee or security
• easy and quick access to credit
• Loan amount is greater since there will be a lower margin requirement than with other alternative credit facilities.

Benefits of Bill Discounting for Buyers

• better pricing negotiating with suppliers or vendors
• optimises raw material supply
• Relationships with partners in the value chain are strengthened