Bill Discounting

Just like we all need a regular supply of oxygen to survive, businesses require a steady supply of funds to survive and grow. Once a business is in running mode, it incurs certain production and distribution expenses. Forced by market considerations and to boost sales and build brand loyalty, most sellers offer their products and services to buyers on credit. 

Until the seller receives payment against this product, the funds are blocked. While the payment is awaited, the business has to continue operating. It needs money to pay employees’ salaries, procure raw materials, and other day-to-day expenses. So, there is a requirement for funds to meet such operating expenses. 

What is Bill Discounting?

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.

Example of Bill Discounting:

Let’s take an example to understand this. You are in the business of office stationery and have supplied some office stationery to ABC Corporation. The invoice amount is, say, Rs. 1,00,000. Now, AMC Corporation (The buyer) agrees to make the full payment after 30 days. 

But if you need the money before 30 days, the buyer will issue you a letter of credit from the bank for 30 days. You can approach the bank and collect payment against that invoice much quickly. For making this ‘advance payment’, the bank will charge some interest from you. So, you will get a discounted amount from the bank. Assuming the discount rate is 5%, the bank will charge you Rs. 5,000 and deposit Rs. 95,000 in your account. At the end of 30 days, the bank will collect Rs. 1,00,000 from the buyer.

This way, that particular invoice would get settled. This financial transaction involving the seller, buyer, and financial institution is called bill discounting or invoice discounting. 

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.

Features of Bill Discounting:

1. 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.
2. 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.
3. 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.
4. 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. 

Bill Discounting Rate of Interest:

Most banks and NBFCs do not have a fixed interest rate for discounting bills. Any financial institution considers several factors before deciding on the discount, which may vary from customer to customer.

The various factors that go into consideration for deciding the discounting rate are:

• Financial history and credit score of the seller
• Years of being in the business
• Business volume
• Credit-worthiness of the buyer
• Stability of the business and industry

Eligibility Criteria: 

The eligibility criteria for bill discounting varies from lender to lender and is generally decided by the management of the respective financial institution offering the service. However, the most common criteria for bill discounting are listed below:

• The company should have been in business for a reasonable period of time. Most financial institutions ask for a minimum of 3 years of being in the business.
• The seller should have dealt with at least 2 investment-grade companies. 
• The credit score must be a minimum of 650 or above.
• The business must have a minimum turnover of 1 Crore.

Factors that affect the eligibility:

In addition to the criteria mentioned above, some general guidelines that affect the eligibility for bill discounting are listed below:

• Number of years in the business
• Nature or type of business
• Business Volume and Annual Turnover
• Financial Stability of the seller
• Repayment history and capability of the buyer
• Business Positive Net worth or Profitability
• Credit rating of a business
• Previous loan defaults, if any

Documents Required for Bill Discounting:

Some of the most common documents required for approving a bill discounting are:

• Duly filled application form with passport-sized photographs
• Business PAN card and address proof
• Applicant’s Aadhar card.
• GST Returns
• Income tax return & Financial statement with an audit report.
• Business Establishment Proof
• Last 12 months’ bank statement
• Bill of Exchange
• Letter of Credit
• Commercial Invoice
• Packing list with all the details
• Logistics details with a copy of the delivery note, if any
• Proof of certificates, registrations, licenses, and permits, if any
• Any other document required

Benefits of Bill Discounting

Bill discounting, as a financial transaction, is beneficial to all the parties involved – the seller, the buyer, and the financial institution. The buyer and the seller can stabilize their fund flow, while the financial institution can use the funds lying with them and make some profit on it.

The specific benefits of bill discounting are as follows:

• Improves cash flow position: All businesses, big or small, depend on cash flow to survive and grow. Bill discounting facility helps inject a quick cash flow into the business and help the businesses survive and flourish. The money received quickly may be used to pay salaries, procure raw materials for the next order, or invest in some new asset.
• Provides instant access to cash: For a seller, a bill discounting facility is a quick and hassle-free way of getting payment against their invoices. It helps them manage their working capital better and keep the working capital cycle short. Most financial institutions like MYND offer funds within 24 to 72 hours.
• No collateral involved: Bill discounting, as a process, is very simple. It does not involve much documentation. Secondly, the seller is not required to provide any collateral security to get the funds. The invoice itself is strong enough collateral to get the funds.
• No debt incurred: Getting funds using a bill discounting facility does not put the buyer under any kind of debt. Here, the buyers get money against the invoices, which is anyways due to them. It just helps them get the money. So, it does not create any debt liability for them. Compared to traditional financing models, a bill discounting facility is safe from any kind of loss or damage.
• No impact on business sheet: Bill discounting facility does not create any tax liability. It is more of an off-the-book process. So, it has no impact on the balance sheet of the business.

Bill Discounting Versus Business Loan

S.NO	Comparison Parameter	Business Loan	Bill Discounting
1	Requirement of Collateral	Collateral Required	Not Required
2	Processing Time	Long. Usually takes weeks	Quick within 2-3 days
3	Suitability	Usually taken for long-term requirements	Suited for short-term requirements
4	Mode	Generally manually	Completely digital
5	Document Process	Lengthy & Complex	Simple eligibility criteria
6	Eligibility Criteria	Very strict	Simple
7	Impact on the Balance Sheet	Considered a debt hence impact the balance sheet	Off the book process. Hence, No Impact on the balance sheet

Conclusion:

All businesses need money to run their operations. Compared to business loans, bill discounting is a better option to get funds, as the process is quite simple and does not create any kind of liability.

Working with a reputed financial partner like MYND helps the business get the funds at a reasonable discount. With declining interest rates, more and more MSMEs are opting for business discounting as a preferred method of financing their short-term funds’ requirements.

FAQs:

Q.1: What is bill discounting?

Ans: Business Discounting is a trading activity that allows sellers to get quick payment for their work. It helps them meet their operating expenses without depending on any external agency to provide the funds.

Q.2: Is bill discounting a loan?

Ans: Bill discounting allows the buyer to borrow funds for a short term against the discounted invoice from the lender. So, it can be treated as a loan.

Q.3: Can NBFCs offer bill discounting facilities?

Ans: Yes, NBFCs can offer bill discounting facilities. In fact, they provide better facilities as compared to banks.

Q.4: What is the repayment period in case of bill discounting?

Ans: The repayment period is equal to the credit period allowed by the buyer to the seller.

Q.5: How is the interest calculated on discounted bills?

Ans: The interest is calculated as per the guidelines of the lender for the credit period or the tenure of the bill which maybe 30 days, 60 days, 90 days, etc. as the case may be.

Q.6: Who collects the payment due for the bills discounted?

Ans: The payment may be collected by either of the two parties. This is discussed and agreed upon between the seller and their bank.

Q.7: Are GST, TDS, and VAT applicable on bill discounting?

Ans: No. GST, TDS, and VAT are not applicable on Bill discounting.