Bill Discounting and Purchasing28th April 2020
Bill Discounting is a method of trading the bill of exchange to the financial institution before it gets matured, at a price that is in a smaller amount than its par value. The discount on the bill of exchange will be based on the remaining time for its maturity and also the risk concerned in it.
Bill discounting is a discount/fee which a bank takes from a seller to release funds before the credit period ends. This bill is then conferred to the seller’s client and the full amount is collected. Bill discounting is mostly applicable in scenarios when a buyer buys goods from the seller and the payment is to be made through a letter of credit. It is an arrangement whereby the seller recovers an amount of sales invoice from the financial intermediaries before it’s due. It is a business vertical for all kinds of financial intermediaries such as banks, financial institutions etc.
Bill discounting is a major trade activity. It aids the seller’s get funds earlier upon a small fee or discount. It also helps the bank earn some revenue. When the due date of the credit period comes, the borrower or (seller’s) customer can pay money then.
Bill discounting refers to a method of working capital finance for the seller of goods. It refers to a fee charged by the bank from the seller of the goods to release funds before the end of the credit period. The bill is presented to the customer and the amount is collected by the bank. It is mostly applicable in cases where letter of credit is used as a mode of payment. Bill discounting is also commonly known as invoice discounting or the purchase of bills. It is a major trading activity wherein the seller of the goods gets funds before the term of the letter of credit expires for a small amount charged by the bank as fees.
The fee paid by the seller to the bank or the financial intermediary usually depends upon the time left before maturity of letter of credit for which the bill is discounted and the risk perceived. It also depends a great deal over the credit worthiness of the seller and the past payment history of the buyer of goods.
Bill Discounting Companies in India
Bill discounting provides, as a present-day alternative to traditional working capital requirements, immediate access to funds can be provided to entrepreneurs by using their unpaid bills or goods received notes (GRN) as collateral. At present, many banks and non-banking financial companies (NBFCs) provide bill /GRN discounting services to business owners. Hence, an entrepreneur has the option to choose from a wide range of bill discounting service providers. But choosing a good provider is the key to go hassle free and save costs.
Myforexeye an online bill discounting platform where business owners get an opportunity to raise funds for their working capital needs at attractive terms by selling their unpaid invoices raised. Myforexeye aims to remove operational inefficiencies around the invoice discounting space by extensively using technology and reduction in interest rate costs.
Bill Discounting Process
The Process of Bill Discounting is as Follows;
- The seller ships the goods on credit to the buyer and sends the invoice to them
- The buyer accepts the invoice and acknowledges payment is due after credit period over.
- The seller approaches the bank to discount the bill.
- The bank transfers the fund to the seller after deducting discount fee as per the norms.
- When the payment is due, the bank or the seller collects the money from the buyer.
- The bank wants the following conditions to be fulfilled to discount the bill:.
- The bank will look into the seller’s reputation and previous payment history of the buyer.
- The buyer should have a reputed bank. This will ensure seller bank that buyer is reliable.
- The bill should be a usance bill.
The terms ‘bills purchase’,’ bills discount’ and ‘bills negotiation’ are respectively used by the bank for financing against ‘Demand Bills’,’Usance Bills’ and LC bills. The seller of goods (exporter) gets immediate money from the bank for the goods sold by him irrespective of whether it is a purchase, discount or negotiation by the bank according to nature of bills.
For an importer, original shipping documents are required for the purpose of taking delivery of goods shipped to him by the exporter. To enable the importer to take delivery of the cargo shipped to him, the exporter after shipment of goods prepares necessary set of documents like commercial invoice, packing list, certificate of origin, quality certificate, Bill of lading/Airway bills, dock warrant, dock receipt, warehouse receipt, etc. along with order for the delivery of title to goods. The set of documents so prepared will be submitted by the exporter to his bank for onward transmission of documents to the importer’s destination, with an instruction to collect the invoice amount of goods dispatched by him under contracted terms.
Facility of Bill Purchasing
- If this Sale is a Credit Sales, then the seller will get the money from the purchaser only after the expiry of credit period.
- If the seller does not have extra money, during the period between credit sales and realization of money from debtor, he will not be able to buy more goods and sell again at a profit.
- To facilitate the business of manufacture, trade etc, banks help you by giving financial resources in the form of Bill Discounting Facility and the bank’s bill finance product helps you bridge the fund gap between the date of sale of products to the receipt of payments.
- The bank purchases the bill of exchange your company receives against a product sale, at a discount, thus doing away with the delay in realizing the receivables.
- The extent of discounting would amount to the interest calculated till the payments for the original sale are realized, and will be determined on the basis of market interest rates as well as the credit rating of the borrower.
- So, don’t keep the funds blocked during the credit period but get them discounted and increase your sales turnover.