Bill Discounting: Process, Example, Benefits, and Rate of Interest

Bill discounting is a quick and efficient way for businesses to address their cash flow needs by leveraging unpaid invoices. It provides a financial lifeline, ensuring smooth operations without waiting for delayed payments. This method benefits sellers, buyers, and financial institutions alike, fostering a stable financial ecosystem.

This article will explain the process, example, and benefits of bill discounting and provide an overview for businesses looking to navigate the details of this financial mechanism.

What is a bill discounting?

Bill discounting is a helpful way for businesses to access funds quickly using unpaid invoices. Suppose you are a seller who has provided goods or services on credit and are awaiting payment. Instead of waiting for the payment due date, you can approach a bank or financial institution to discount the invoice. The institution provides funds upfront, minus a discount charge or commission. When the invoice matures, the buyer pays the bank instead of the seller.

For instance, if a seller issues an invoice of Rs. 50,000 with a two-month credit period, but needs immediate funds, they can discount the bill with a bank offering a 4% discount rate. The seller receives Rs. 48,000 upfront, and the bank collects Rs. 50,000 from the buyer on maturity.

Bill discounting process

The process of bill discounting involves the following steps:

• MSMEs and supply chain finance entities raise invoices for goods supplied or services rendered
• The seller approaches a lender to monetise these unpaid invoices through invoice discounting
• Upon approval, the lender provides funds within a few working days at a discounted rate

This streamlined process ensures that MSMEs can maintain their working capital cycle without disruptions.

Example of bill discounting

Consider a stationery supplier who delivers goods worth Rs. 1,00,000 to ABC Corporation, with a 30-day payment term. If the supplier needs funds before this period, they can approach a bank with the invoice and get a discounted amount.

For example:

• Invoice amount: Rs. 1,00,000
• Discount rate: 5%
• Discount charge: Rs. 5000
• Amount received: Rs. 95,000

The bank collects the full invoice amount from ABC Corporation after 30 days. This transaction benefits all parties and highlights the practicality of bill discounting or invoice discounting.

Eligibility criteria for bill discounting

To avail the benefits of bill discounting, businesses must meet the following eligibility criteria:

• The seller and buyer must have a documented agreement detailing the payment terms
• The seller must provide a valid invoice raised against the buyer for the pending payment
• The invoice must specify a fixed due date agreed upon by both parties

Meeting these criteria ensures a smooth and efficient discounting process.

Features of bill discounting

Key features of bill discounting include:

• Evaluation of parties: Financial institutions assess the reputation of the seller and the buyer’s creditworthiness to minimise risk
• Immediate cash availability: Sellers receive funds instantly after the invoice is discounted, enabling uninterrupted business operations
• Discount charge: The difference between the invoice’s face value and the amount disbursed by the institution is calculated at a specific rate
• Maturity period: Payment terms typically range from 30 to 120 days, based on the agreement

These features make bill discounting a flexible and efficient financial solution.

Bill discounting rate of interest

The discounting rate varies based on several factors, including:

• Financial history and credit score of the seller
• Business experience and industry stability
• Creditworthiness of the buyer
• Business volume and transaction frequency

Banks and NBFCs evaluate these aspects to determine a fair discounting rate, ensuring equitable terms for all parties.

Documents required for bill discounting

The following documents are generally needed for bill discounting approval:

• Application form with photographs
• Business PAN card and address proof
• Aadhar card of the applicant
• GST returns and income tax statements
• Financial statements with audit reports
• Business establishment proof
• Bank statements for the last 12 months
• Bill of exchange
• Commercial invoice and letter of credit
• Delivery note and packing list with required details
• Proof of certificates, registrations, licenses, and permits

Submitting these documents ensures a seamless and hassle-free discounting process.

Benefits of bill discounting

Bill discounting offers numerous advantages, including:

• Improved cash flow: Businesses can inject funds into their working capital cycle, ensuring smooth operations
• Instant access to cash: Sellers receive payments quickly, enabling better financial planning
• No collateral required: The invoice itself serves as security, simplifying the process
• Debt-free financing: Sellers access their receivables without incurring additional debt
• No impact on balance sheets: Since it is an off-the-book transaction, it does not affect the business’s financial statements

These benefits make bill discounting an attractive option for businesses of all sizes.

Conclusion

Bill discounting is an invaluable financial tool for businesses seeking to manage cash flow efficiently. By leveraging unpaid invoices, companies can maintain their working capital and sustain growth. For businesses needing additional financial support, a Bajaj Finserv Business Loan offers competitive rates and flexible terms to meet diverse requirements.

Take control of your business’s financial future with bill discounting and tailored solutions like the Bajaj Finserv Business Loan. Apply today and unlock your growth potential!