Bill Discounting

Bill Discounting: A Short-Term Financing Solution for Traders

Bill discounting is a short-term financing method that enables traders to manage cash flows by selling unpaid invoices due on future dates to financial institutions. The bank purchases the promissory note before its maturity, credits the bill amount (after deducting a discount fee) to the trader’s account, and collects the payment directly from the debtor on the due date. This facility enables businesses to streamline their payment cycles and maintain liquidity without affecting their balance sheets. Generally, bill discounting is offered for a tenor of up to 180 days.

How It Works – Example:

Suppose a business owner sells goods worth 20,000 to Mr. X on credit, with payment due in two months. If the owner needs immediate funds, they can approach a bank for bill discounting. Assuming the bank charges a 12% p.a. discount rate, the business owner receives 19,600 after paying a commission of 400.

Steps in the Bill Discounting Process:

1. Raising Invoices: MSMEs or supply chain entities issue invoices to larger corporates for goods or services provided.
2. Submission to Lender: Enterprises present these unpaid invoices to financial institutions for monetisation.
3. Invoice Conversion: The lender evaluates the invoices and disburses the discounted cash amount to the business within a few working days.

Factors Influencing Discount Rates:

The discount rate varies depending on:

• Financial history and creditworthiness
• Business tenure and stability
• Volume of transactions
• CIBIL score and repayment record

Eligibility Criteria:

To qualify for bill discounting, the following documents are typically required:

• A documented contract and payment agreement between the company and the customer
• A purchase order in response to the sales order
• An invoice was raised for the pending payment
• A fixed payment date agreed upon by the customer

Advantages of Bill Discounting:

For Vendors:

• Enhances working capital and cash flow without altering the balance sheet
• Requires minimal or no collateral/guarantee
• Provides quick and easy access to credit
• Higher loan amounts due to lower margin requirements compared to other financing options

For Purchasers:

• Facilitates better price negotiations with suppliers
• Ensures a steady supply of raw materials
• Strengthens relationships with value chain partners

Leading Providers of Bill Discounting Services:

Here are some banks and NBFCs that offer invoice discounting facilities:

• Banks: SBI, HDFC Bank, ICICI Bank, Federal Bank, Bank of Baroda, Central Bank of India, South Indian Bank, IDBI Bank, Abhyudaya Co-operative Bank
• NBFCs: Bajaj Finserv, TATA Capital, Lendingkart Finance, Capital Float, Indifi Finance, EFL Finance, Hero Fincorp

By leveraging bill discounting, businesses can unlock immediate liquidity, enhance financial flexibility, and improve operational efficiency.