Bill discounting is a simple process of selling the bill of exchange to the bank or a financial institution before its maturity at a price less than its actual price. The discount charges will depend on how much time remains for its maturity and the risk factor involved.
Meaning of bill discounting
Bill discounting is a type of invoice financing in which funds are issued against unpaid sale invoices. The financial institutions issue an advance to the seller at discounted rates. The business is not required to pledge any asset as collateral. The loan is advanced based on unpaid sale invoices. At the time of maturity of the invoice, the business will collect the payment from its customer and make the repayment to the financial institution. It is an easy way to improve cash flow in the organisation.
Advantages of bill discounting
- Fast and easy- The documentation required is very minimal. The financial institution grants loans within hours in case of emergencies.
- Collateral free- No asset is required to be kept as collateral. The loan is granted against unpaid sale invoices.
- Cost-effective lending facility- Bill discounting has two costs, i.e. service cost and discounting charge. The service fee is usually charged as a percentage of the annual turnover, and discounting charge is the cost of lending money. Despite these two charges, it is considered the most cost-effective lending facility by ensuring quick access to cash.
- Maintains confidentiality- The business has complete control over its sales ledger, and the customer is nowhere in the loop in this type of financing.
Ways in which bill discounting help business grow
- Helps in improved cash flows- Instant cash availability helps strengthen the business’s momentum. By opting for bill discounting, a business has enough funds to run its operations smoothly and even carry out expansion activities.
- Improved customer trust- When the customers know that they have time to make payments and the business is not solely dependent on that cash for its daily operations; they will trust you more. This will bring you more customers.
- Helps to shorten the cash cycle- The time involved to complete the cycle of selling goods and releasing its money is an extended period. In this period, one can undertake new projects to expand the business. One can trim this cash cycle by opting for invoice discounting.
- Helps to address emergencies- Businesses usually face emergencies to change in market demand of their goods or services. One can promptly face these emergencies if cash access is easy. Increased demand can be met by increasing production as cash is readily available.
- Easy credit availability- Nowadays, availing credit has become hassle-free with digital financial solutions. One can just upload the unpaid bills and avail funds by following a few simple steps. Easy credit availability helps to grow business.
Thus, we can conclude that by availing bill discounting facilities, one can make utmost use of its resources and grow its business.