What is bill discounting?
Bill discounting is a widely common practice in the business world. It enables the organization 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.
Bill discounting or invoice discounting can be done at any banks or financial institutions by the beneficiary of the bill.
As mentioned above, the term bill discounting refers to receiving the amount of the bill or the invoice by exchanging the same at a preferred or partner lender of the beneficiary of the invoice but not at the full amount of the invoice. The banks charge a percentage of fees for such benefit which essentially means that the bill is discounted at a particular rate. The banks or lenders earn a percentage of fees for such service provided to the beneficiary and the beneficiary receives the dues of the bill immediately without having to wait till the end of the credit period.
The invoices discounted under this practice are known as bills of exchange. Bill discounting is a form of loan that is available to the beneficiary of the invoices and has to be repaid if the bank or the lender does not realize the amount of the bill when presented to the buyer at the time of maturity or at the end of the credit period.
Procedure for Bill Discounting
The practice of bill discounting is very common in the business world and is part of the day to day activities or transactions in any business organizations. Therefore the process of bill discounting is simple and quick to ensure immediate release of funds to the seller without any unnecessary delays.
The steps involved in the bill discounting process are detailed below,
- The seller and the buyer enter into a contract for sale of goods or services.
- The seller raises the invoice upon the buyer for the goods sold.
- The buyer accepts the invoice raised, which entails the acceptance of payment of the dues mentioned in the invoice.
- The seller will then approach the partner bank or lender for bill discounting.
- The lender upon assuring the authenticity of the transaction and the creditworthiness of the buyer will release the funds to the seller after deducting the agreed margin, fees and discount.
- At the time of maturity of the bill, the lender or the seller’s bank will duly present the bill and collect the dues from the buyer.
As per the agreement 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 the case may be. In case, the dues are to be collected by the seller they have to be duly paid back to the seller bank upon receipt. This makes it essentially a type of loan which has to be repaid at the end of the credit period.
Benefits of Bill Discounting
The main benefit of the bill discounting model is the immediate availability of funds to the seller. This keeps the wheels of the business churning without any liquidity issues.
Bill discounting essentially takes the colour of a short term loan available to the sellers which helps them with their working capital requirements.
The availability of lender banking options is huge for the seller to choose from which ensures reduced margins and fees for the seller. Some lenders even assume the risk of bad debts although the cost for such discounting will go higher due to increased risk.
The process of bill discounting ensures easy, prompt and hassle free disbursal of funds to the seller.
Interest or fees are charged by the banks only on the amount utilized or availed by the seller making it less costly as compared to traditional loan.
Frequently Asked Questions
Is the bill discounting a loan?
Yes. Bill Discounting can be considered to be a type of loan as the bank allows the borrower short term funds against the bill or invoice discounted which have to be repaid to the bank on the due date of the bill.
What is the repayment period in case of bill discounting?
The repayment period for the bill discounted will be the credit period allowed to the buyer as per the terms of the sale.
How is the interest calculated on discounted bills?
The interest is calculated as per the guidelines of the lending bank or financial institution for the credit period or the tenure of the bill which may be 30 days, 60 days, 90 days, etc as the case may be.
What are the methods of presenting a discounted bill for payment?
Bill Discounted can be presented to the buyer’s bank for payment in any of the two common ways i.e. with recourse or without recourse.
Who collects the payment due for the bills discounted?
The payment for the bills discounted can be collected by either the seller or the seller’s bank as per the agreed terms between them at the time of bill discounting.