Bill Discounting is one such option, which allows a business to get quick payment for their work and meet their operating expenses without having to depend on any external agency to provide the funds.
Bill Discounting, also called Invoice Discounting, is a trading activity where a seller sells some goods or services to a buyer. The buyer has to make the payment as per the agreed credit period. Now, if the buyer needs money before that, he can approach a bank or some NBFC and ‘sell’ that invoice to them. The financial institution gets the invoice verified by the buyer and then makes payment to the seller on their behalf. However, they make some deductions, called ‘discount’, as their commission.
So, in a way, the seller gets a discounted payment for their bill. This way, they can run their business operations, and buyers get an extended credit period. On the due date, the seller makes the payment to the financial institution, which completes the cycle for that particular invoice. Since the seller gets payment on a ‘discount’, this transaction is called Bill Discounting.
Meaning of bill discounting
Bill discounting is a type of invoice financing in which funds are issued against unpaid sale invoices. The financial institutions issue an advance to the seller at discounted rates. The business is not required to pledge any asset as collateral. The loan is advanced based on unpaid sale invoices. At the time of maturity of the invoice, the business will collect the payment from its customer and make the repayment to the financial institution. It is an easy way to improve cash flow in the organisation.
FEATURES OF BILL DISCOUNTING:
- Evaluating the seller and buyer: Before approving the bill discounting, the bank or NBFC first checks the seller’s reputation and the buyer’s creditworthiness. This is done to ensure that the buyer does not default on making the payment to the bank.
- Making instant cash available for the buyer: It is the most salient feature of bill discounting. The bank or NBFC purchases the invoice and immediately pays after discounting the bill. This makes life easy for the seller. They get an immediate payment and do not need to wait for the buyer to pay the bill.
- Discount Charge: The difference margin between the face value of the invoice and the amount approved and disbursed by the bank is called the discount. This discount is calculated on the maturity value at a certain percentage per annum.
- Maturity: The maturity date of a bill means the date on which payment of the invoice is due. The average maturity period is 30, 60, 90, or 120 days.
Advantages of bill discounting
- Fast and easy- The documentation required is very minimal. The financial institution grants loans within hours in case of emergencies.
- Collateral free- No asset is required to be kept as collateral. The loan is granted against unpaid sale invoices.
- Cost-effective lending facility- Bill discounting has two costs, i.e. service cost and discounting charge. The service fee is usually charged as a percentage of the annual turnover, and discounting charge is the cost of lending money. Despite these two charges, it is considered the most cost-effective lending facility by ensuring quick access to cash.
- Maintains confidentiality- The business has complete control over its sales ledger, and the customer is nowhere in the loop in this type of financing.
BILL DISCOUNTING PROCESS:
The step-by-step process of bill discounting is given below:
- A seller supplies goods or services to a buyer and raises an invoice.
- The buyer accepts the invoice. This approval means the buyer acknowledges the invoice and promises to make the payment on the due date.
- The seller approaches the financial institution to get the bill discounted.
- The financial institute verifies the creditworthiness of the buyer and the legitimacy of the bill.
- Once approved, the bank disburses the funds to the seller after deducting the pre-defined fee, discount, or appropriate margin.
- Thus, the seller gets a quicker payment for the invoice, which can be used for other business purposes.
- At the end of the original credit period, the buyer makes the payment to the financial institution.
Ways in which bill discounting help business grow
- Helps in improved cash flows- Instant cash availability helps strengthen the business’s momentum. By opting for bill discounting, a business has enough funds to run its operations smoothly and even carry out expansion activities.
- Improved customer trust- When the customers know that they have time to make payments and the business is not solely dependent on that cash for its daily operations; they will trust you more. This will bring you more customers.
- Helps to shorten the cash cycle- The time involved to complete the cycle of selling goods and releasing its money is an extended period. In this period, one can undertake new projects to expand the business. One can trim this cash cycle by opting for invoice discounting.
- Helps to address emergencies- Businesses usually face emergencies to change in market demand of their goods or services. One can promptly face these emergencies if cash access is easy. Increased demand can be met by increasing production as cash is readily available.
- Easy credit availability- Nowadays, availing credit has become hassle-free with digital financial solutions. One can just upload the unpaid bills and avail funds by following a few simple steps. Easy credit availability helps to grow business.
FAQs
What is bill discounting?
Bill discounting, also known as invoice discounting or factoring, is a financial practice where a business can receive immediate funds by selling its accounts receivable (bills of exchange or invoices) to a financial institution at a discount.
How does bill discounting work?
The process involves a business selling its unpaid invoices to a financial institution or a third-party at a discounted rate. The financial institution provides an upfront payment, and when the invoices are due, the institution collects the full amount from the debtor.
Who can benefit from bill discounting?
Small and medium-sized enterprises (SMEs) and businesses facing cash flow challenges often benefit from bill discounting. It provides them with quick access to funds tied up in accounts receivable, helping improve liquidity.
Practice area's of B K Goyal & Co LLP
Income Tax Return Filing | Income Tax Appeal | Income Tax Notice | GST Registration | GST Return Filing | FSSAI Registration | Company Registration | Company Audit | Company Annual Compliance | Income Tax Audit | Nidhi Company Registration| LLP Registration | Accounting in India | NGO Registration | NGO Audit | ESG | BRSR | Private Security Agency | Udyam Registration | Trademark Registration | Copyright Registration | Patent Registration | Import Export Code | Forensic Accounting and Fraud Detection | Section 8 Company | Foreign Company | 80G and 12A Certificate | FCRA Registration |DGGI Cases | Scrutiny Cases | Income Escapement Cases | Search & Seizure | CIT Appeal | ITAT Appeal | Auditors | Internal Audit | Financial Audit | Process Audit | IEC Code | CA Certification | Income Tax Penalty Notice u/s 271(1)(c) | Income Tax Notice u/s 142(1) | Income Tax Notice u/s 144 |Income Tax Notice u/s 148 | Income Tax Demand Notice | Psara License | FCRA Online
Company Registration Services in major cities of India
Company Registration in Jaipur | Company Registration in Delhi | Company Registration in Pune | Company Registration in Hyderabad | Company Registration in Bangalore | Company Registration in Chennai | Company Registration in Kolkata | Company Registration in Mumbai | Company Registration in India | Company Registration in Gurgaon | Company Registration in Noida | Company Registration in lucknow
Complete CA Services
RERA Services
Most read resources
tnreginet |rajssp | jharsewa | picme | pmkisan | webland | bonafide certificate | rent agreement format | tax audit applicability | 7/12 online maharasthra | kerala psc registration | antyodaya saral portal | appointment letter format | 115bac | section 41 of income tax act | GST Search Taxpayer | 194h | section 185 of companies act 2013 | caro 2020 | Challan 280 | itr intimation password | internal audit applicability | preliminiary expenses | mAadhar | e shram card | 194r | ec tamilnadu | 194a of income tax act | 80ddb | aaple sarkar portal | epf activation | scrap business | brsr | section 135 of companies act 2013 | depreciation on computer | section 186 of companies act 2013 | 80ttb | section 115bab | section 115ba | section 148 of income tax act | 80dd | 44ae of Income tax act | west bengal land registration | 194o of income tax act | 270a of income tax act | 80ccc | traces portal | 92e of income tax act | 142(1) of Income Tax Act | 80c of Income Tax Act | Directorate general of GST Intelligence | form 16 | section 164 of companies act | section 194a | section 138 of companies act 2013 | section 133 of companies act 2013 | rtps | patta chitta