It is a trade-related activity in which a company’s unpaid invoices which are due to be paid at a future date are sold to a financier.
In bill discounting, the business trades the company’s unpaid invoices to gain access to short-term financial assistance and maintain the working capital. It is mostly pertinent in cases when a buyer purchases goods from the seller, and the payment is made through a letter of credit. This process is also called “Invoice Discounting”. This process is governed by the negotiable instrument act, 1881.
Features of Bill Discounting
1. Credit Evaluation
A bank will consider the goodwill of the seller as well as the past payment records of the buyer who needs to pay to the bank.
2. Banking Partners
The buyer, who is partnering with a good bank, and has a Good Credit Score, will ensure your bank that the paying party is reliable. The endorsement from the buyer’s bank will work in your favor.
3. Bank to Bank Dealing
Invoice financing transaction happens between banks where the buyer’s bank doesn’t need to intimate the seller of the reimbursement instruction. It deals, directly, with his bank, to determine the discounting terms.
Benefits of Bill Discounting
- Effortless withdrawals
- Flexible repayment tenure
- Strengthened cash flow
- Interest to be paid only on the used amount
- Easy authentication
- Quick processing with hassle-free documentation
Eligibility Criteria
- The business should be a minimum of 10 months old
- Should have dealt with at least 2 large-scale corporate
- Credit score should be 650 or more
- The business ought to have a base turnover of 25 lakhs
Bill Discounting Rate of Interest
The interest rate offered by financial institutions on bill discounting depends on factors that include business stability, financial history, business volume, business tenure, applicant’s credit score, or creditworthiness along with his/her financials.
Business becomes more competitive for buyers and Sellers as they get to enjoy a much lower rate of interest on TReDS platform. Varying from 5% to 8% as opposed to market standard of 15% to 24% PA.
Process of Bill/Invoice Discounting
- Invoices are being raised when the seller sells the goods on credit
- Accepting the invoice means, that the buyer has acknowledged paying the amount on the due date
- For discounting purposes, the seller approaches the financial institution
- As per the creditworthiness of the buyer and legitimacy of the bill, the bank or NBFC is assured
- Bank or NBFC disburses the fund to the seller post deducting the fee, discount, and appropriate margin which is already defined
- Furthermore, the seller receives the funds which can be used for other business purposes
Advantages of Bill Discounting:
Bill discounting is advantageous to businesses, banks, finance companies, and investors. Businesses benefit by rejuvenating their cash-flow in-turn helping them stabilise growth and fund business expenditure.
- Cash flow: Businesses being dependent on the cash flow to sustain their business can easily rely on this quick financial aid to access speedy funds and continue to flourish. This process quickens money inflow profiting the organisation in expanding deals, seeking after development, securing hardware, etc.
- Instant access to cash: Bill discounting is a more efficient, faster way of assessing working capital as it is hassle-free and does not involve lengthy documentation procedure.
- No collateral involved: There is no requirement to keep any asset as security as the unpaid invoice is considered as the collateral itself.
- No debt incurred: Bill discounting helps in saving tax liability. The chances of a company suffering any loss or damage are almost nonexistent when compared to conventional financing frameworks.
- No impact on business sheet: Bill discounting service does not impact the balance sheet of the business as it is an off-the-book process
Disadvantages of Bill Discounting:
- Invoice discounting reduces the investor’s gross profit margin as the bank deducts a huge amount as a fee while discounting bills.
- Most of the financial institutes discount only commercial bills.
- It cannot be thought to be a long term solution for finance as is only a source of short-term fund arrangement.
- New businesses might not be eligible.
Documents Required for Bill/Invoice Discounting
- Duly filled application form with passport-sized photographs
- Business PAN card and address proof
- Applicant’s Aadhar card
- 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 delivery challan, if any
- Proof of certificates, registrations, licenses, and permits, if any
- Any other document required
Top 5 Financial Institutions offering Bill Discounting
1. IDBI
Industrial Development Bank of India (IDBI) is one of the leading development banks of the country, providing credit, banking and financial services to its customers. Corporate, MSME, agriculture, NRI are different sectors where is the prime focus of the bank. Further, we would discuss IDBI business loan schemes which are offered to Micro, Small and Medium Enterprises (MSMEs) nationwide. Omozing
2. Omozing
Omozing helps make Smart Money Moves for a Lifetime. They strive to get lowest interest rates and best terms for your Online Applications at www.Omozing.com . We’ve made business lending smarter, faster and easier by transforming the approval process from stumbling blocks to stepping-stones. This enables borrowers to not just get access to capital, but also understand what areas they need to work on in order to enhance their credit profile. Omozing ensures that Borrowers get a secure, safe and reliable application process that be tracked online.
3. ICICI Bank
ICICI Bank is a leading private sector bank in India. It caters to individuals, startups, as well as existing businesses and offers business loan interest rate from 18% onwards per annum.
4. TATA Capital
Tata Capital offers business loans up to Rs. 75 lakh at an interest rate of 19% onwards. The entire process of availing loan and repayment of the same is very smooth and flexible.
5. Bank of Baroda
Bank of Baroda (BOB) is a renowned public sector bank that offers business loans and MSME loans to self-employed professionals, MSMEs (Micro, Small and Medium Enterprises), corporates and business owners. Various other types of business loans offered by the Bank of Baroda are Working Capital, Term loans, MSME loans, Bill discounting, Overdraft, etc.