Bill discounting vs bill negotiation

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08 min read.

Bill discounting and bill negotiation are methods used to release funds tied up in the invoices. But, both of them are carried out differently and in different conditions. Exporters need to be thoughtful about which option to be used under various circumstances.

Understanding bill discounting and its advantages

A business can opt for a bill discounting facility to avail short-term financial assistance. Bill discounting process involves selling unpaid invoices to a financier. These invoices are sold to the financier at discounted rates. The exporter will have to reach out to a bill discounting platform to avail credit. The sanctioned amount against the bill depends on the businesses’ financial history, credit score, etc.

For example, if ABC Limited sells goods to XYZ Limited for Rs.50,000 for a credit period of 30 days. But, if ABC Limited needs money, he can sell this unpaid invoice to a financier at a discounted price. They may charge a 15% discount and issue Rs.42,500.

Bill discounting will lead to less earning, but at the same time, it provides early cash to meet the working capital needs.

Advantages of bill discounting are:

  1. The process of bill discounting is quite relaxed as compared to bill negotiation.
  2. The exporter can maintain confidentiality as the buyer is completely kept out of this setup. Ultimately he can win customer trust.
  3. The exporter has complete control over his sales ledger, unlike the bill negotiation process.
  4. The exporter can easily avail the funds as the documentary formalities are less stringent. The funds are usually released within 24 to 72 hours. The exporter gets a cash boost to meet its working capital requirements.
  5. This facility can be availed without any asset collateral.

Understanding bill negotiation and its benefits

Bill negotiation happens after shipment. The exporter has to prepare necessary export-related documents such as commercial invoice, bill of lading, packing list, bill of exchange, etc., which are sent to the buyer for receiving the delivery of goods. The exporter must ensure that all the conditions mentioned in the letter of credit are met.

Such documents are then negotiated with the banks to avail a credit facility. The bank or financial institution will verify all the documents before issuing a credit against the invoice amount. It will deduct the applicable charges from the invoice amount. The risk of non-payment is less as it is guaranteed by a letter of credit.

Benefits of bill negotiation are:

  1. Negotiation under a letter of credit is much simpler than availing normal working capital limits from a bank.
  2. The export documentation is perfect as funds won’t be released without it.
  3. From the financers point of view, bill negotiation is less risky as it is backed by a Letter of Credit.

Should exporters choose bill negotiation or bill discounting?

Bill discounting and bill negotiation boost cash inflow in an organisation. This inflow helps to meet the liquidity crisis.

Bill discounting is usually available in the case of non-disputed international trade transactions. If the exporter thinks that the risk of non-payment is less, he can use this facility as bill discounting is not backed by a letter of credit. The second reason to avail this facility is the confidentiality factor. The buyer is not kept in the loop in this type of financing, so complete confidentiality can be maintained. 

But, if the risk of non-payment is high, and it is a high-value invoice with a new party, one can go for bill negotiation as it is backed by a letter of credit.

In the end, exporters need to wisely choose a perfect option per the trade circumstances and its liquidity crisis.

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