Meaning of Bill Discounting
Bill discounting is one of the most efficient financing alternatives. It is similar to invoice discounting in terms of its definition and working.
Bill discounting involves a business receiving money from a lender — generally a bank, but can also be other financial institutions — in return for a bill of exchange drawn by it on its customer.
The lender deducts a specific amount from the money lent as their fee / commission.
On the bill's due date, the bank collects the payment amount specified on it from the borrower’s customer.
If there is a delay in this payment, the borrower or their customer is legally obligated to pay the lender a pre-set interest amount as per the clauses included in the bill.
What Are the Types of Bill Discounting in India?
Standard Bill Discounting
Also known as disclosed bill discounting, this financing option involves the discounting of bills, recovery of money, and other discounting processes, with both the stakeholders, the exporter and importer, being aware of the discounting company's presence in their trade agreement.
At the end of the due date, the company may approach the client's customer to recover their client's bill money.
Benefits This is among the quickest alternatives for businesses to discount their bills and create cash. This is a cheaper alternative than undisclosed bill discounting.
How it Helps Businesses The quickest way to raise finance via the bill discounting route, standard bill discounting is used by businesses to constantly maintain a stable working capital and make the most of their trade receivables.
If there is a downside, it is the non-confidential nature of this option. The presence of a third-party in the deal may strain the relationship between an exporter and their customer.
Cost of Standard Bill Discounting Like other forms of discounting, the price of this option also ranges from 0.04% to 3% of the total invoice value, figures that are subject to change frequently.
Undisclosed Invoice Discounting
In this kind of discounting, also known as confidential invoice discounting, the discounting company or bank carries out the functions of funding and recovery for their clients without their customers knowing about it.
When the bill due date approaches, the customer is supposed to make their payment into a controlled, confidential account that the discounting company can access. This service is more expensive to purchase than the one in which the client's customer is aware of the discounting company's presence in the equation.
Benefits Helps businesses maintain long-term trade relationships with customers. As it does not show on a business's balance sheets, it is entirely off the books for all stakeholders.
How It Helps Businesses This invoice sub-type allows businesses to compartmentalize their borrowings and sales records.
In the long-term, this is useful to bolster the reputation of businesses as they can keep their business operations relentlessly running, maintain strong relationships with their clients, and make the most of their bills and other trade receivables.
Cost of Undisclosed Invoice Discounting Invoice discounting rates in India are highly volatile, ranging from as low as 0.04% of the invoice value, up to 3% or even more. These rates are dynamic and may change from one lender to another.
Full Turnover Invoice Discounting
Also known as whole turnover invoice discounting, this option involves businesses selling their entire sales ledger to an invoicing or discounting company.
In fact, several companies may automate the process, so as soon as a bill of exchange is received, businesses can discount it for cash.
Although this may take away an element of control from the hands of businesses, it also streamlines the finance-raising process. With whole turnover invoice discounting, businesses do not have to spend hours applying for discounting at their bank.
Benefits This alternative offers the quickest way for businesses to discount their bills and create cash. This is a streamlined process that reduces the lead time of an organization’s logistics operations.
How it Helps Businesses This is an ideal option for businesses in long-term project-based contracts with their customers. It allows them to provide long-term services or the prospect of distributing products wholesale without finance-related interruptions. In short, whole turnover invoice discounting is the best option for businesses prioritizing continuity.
Cost of Full Turnover Invoice Discounting
The cost of invoice discounting in India can range from as low as 0.04% to 3% of the total invoice value.
Discounting companies can also charge differently for the first week or month and a changed amount periodically after that.
The rates and terms of discounting may change from one lender to another. The rates also depend on external factors, such as government regulations and special schemes.
Partial Turnover Invoice Discounting
Also known as selective invoice discounting, this is like a subset of whole turnover invoice discounting. In selective invoice discounting, businesses can choose which receivables they want to sell to the invoice company.
As opposed to the whole turnover method, which is continuity-focused, this invoicing type is more control and confidentiality-driven.
Benefits Businesses have greater control over the management of their trade receivables. Additionally, businesses can share only the information they feel comfortable sharing with an invoicing company using this option.
Selective financing is a more confidential invoicing option compared to whole turnover invoice discounting.
How it Helps Businesses Several businesses do not need to discount all their bills and other receivables. Some businesses may use a hybrid financing strategy, which involves raising a percentage of their finances through discounting and a bigger proportion through other avenues such as credit lines or working capital loans.
Selective invoice discounting becomes an ideal option for such businesses.
Cost of Selective Invoice Discounting While the costs change from one lender to another, they can range from about 0.04% to 3% of the total invoice value. Usually, lenders use dynamic rates and change them based on various factors.
Clean Bill Discounting
This is the type of bill discounting option in which a discounting company receives clean bills, or, in other words, bills that do not need to be accompanied by other documents while being issued, from a business before releasing funds against them.
Benefits Clean bill discounting enables businesses to receive funds through a simple process, often involving just a single window contact with a discounting company.
More importantly, the turnaround time of clean bill discounting is among the quickest.
How it Helps Businesses Clean bill discounting services can be highly customized based on a business's requirements. As a result, it is considered to be one of the more flexible discounting options out there. Additionally, the low turnover time of this option makes it an ideal option for emergency-based situations.
Cost of Clean Bill Discounting As with the other forms of bill discounting, the costs for clean bill discounting also can fall between the 0.04 to 3% of the total invoice amount.
Additionally, the rates and percentages may vary from one discounting company to another.
LC-Backed Bill Discounting
As its name implies, an LC-backed bill discounting transaction involves discounting companies offering funds to sellers against the Letters of Credit received from their buyers over an international trade transaction.
Benefits LC-backed discounting is known for having a simplified process and minimal documentation.
More importantly, just like clean bill discounting, this option also involves expertise and manpower dedicated for individual transactions for greater customization of services.
How it Helps Businesses The quick turnaround time of LC-backed bill discounting makes it an ideal solution to fix short-term working capital deficiencies for businesses.
Cost of LC-Backed Bill Discounting Keeping with the theme, the costs of LC-backed bill discounting may vary from 0.04 to 3% of the total invoice amount.
The costs and percentages can change from one financier to another.
Organizations have a diverse range of needs when they look to raise funds against their bills of exchange.
These needs may arise due to situations out of their control, preferences / priorities, or financial constraints.
Fortunately for them, this is not a significant problem.
The plethora of options in discount-based financing means that, whatever their needs, businesses will always have a bill discounting option that helps them meet their objectives.
