Need for and Features of Bill Discounting

When a business needs to secure funds quickly, there aren’t many options. Time-strapped business owners could apply for a traditional business loan or an extension to their line of credit. However, it takes time to review their creditworthiness, and this process can’t guarantee a positive result each time. So when a business loan isn’t an option, bill discounting may be the right solution for a business.

Meaning of Bill Discounting

Under bill discounting, a bank receives the bill drawn by a borrower (vendor) on its customer and pays the borrower immediately after deducting some amount as a discount or commission. The bank then presents these bills to the customer and collects the total billed amount on the due date. Bills can be discounted using the following methods: 

With Recourse

Bill discounting with recourse simply means that the borrower would remain liable for the debts that its customers don’t settle. Where the bank cannot collect the payments at the maturity of such bills, the business would need to refund the amount received against such invoices.

Without Recourse

In bill discounting without recourse, the seller’s bank accepts full liability in case of non-payment of invoices by its customer. This option is best suited if there’s an element of doubt about the ability of the customer to pay its dues. The bank’s additional risk is reflected in its higher fees and less cash released for invoices.

Features of Bill Discounting

Credit Evaluation

Before sanctioning any bill discounting, a bank evaluates the borrower’s creditworthiness by checking its past repayment track record, financial stability, and creditworthiness to avoid any risk of bad debts. Further, banks also evaluate the buyer profile to extend the bill discounting facility to the vendor.

Instant Cash

With bill discounting, instant cash is made available to businesses for improving their organisational liquidity and velocity of cash. A business need not wait till its bank receives the payment of the bill from the customer.

Maturity

The maturity date of a bill is when the payment would become due. Usually, the maturity periods range from 30 to 120 days. However, it’s generally easier for a business to get advances for bills maturing within 90 days.

Discount

Discount is the margin between the funds advanced by the bank and the face value of the customer bills or invoices and is calculated at a certain percentage on the maturity value.

Preferred Banking Partner

The seller’s bank prefers that the buyer partner with a reputable bank with a good credit score. This will help the seller’s bank ensure that the buyer is reliable. This allows the seller in bargaining for lower fees from the bank