Bill Discounting is often also referred to as Invoice Discounting. However, while any bill of exchange can be discounted in the Bill discounting process, only invoices can be discounted in the Invoice Discounting process.
Bill Discounting (Invoice Discounting)
Imagine running a thriving business where your sales are solid, clients are dependable, and invoices are set to bring in healthy cash flow—just not soon enough. Your daily operations need a financial boost right now, and that pile of unpaid invoices feels like a locked treasure chest you can’t yet open. Enter the world of bill discounting, a powerful financial tool that helps businesses tap into the value of their accounts receivable, transforming tomorrow’s payments into today’s working capital.
In essence, bill discounting turns your outstanding invoices into immediate funds. By partnering with a financial institution that verifies the creditworthiness of both you and your debtors, you can receive an advance (often up to 90% of your invoice value) in exchange for a fee. It’s a win-win: you get access to cash when you need it most—whether it’s to cover urgent expenses, seize a growth opportunity, or maintain a steady supply chain—while the financial institution earns a commission for bridging the liquidity gap.
This process doesn’t just keep your business humming; it can supercharge your growth strategy. As part of OneNDF’s comprehensive financing solutions, bill discounting enables you to meet immediate financial requirements without piling on long-term debt. Let’s break down how this flexible financing option works, explore its key benefits, and understand why it might be the perfect solution to accelerate your business’s cash flow cycle. please make this short and write for your requirement.
What is Bill Discounting?
Bill Discounting is a mechanism through which a company sells its Account Receivable (outstanding debt) to a Financial Institution to get cash-in-hand for its immediate financial needs. The Financial Institution may check the authenticity of the Account Receivable and the company’s creditworthiness to provide an advance against those debts. In doing so, it would charge a Discounting fee, which is their commission. Thus, the company receives an advance of an amount less than the bill’s face value (upto 90%).
Once the client of the company makes the payment on their end, the money is repaid by the company to the discounting institution. This allows a company to not wait for the payment from its client and use its existing outstanding bills to maintain the required cash flow for functioning.
The process of Bill Discounting is always with recourse. That means, if the payment is not made by the client on time, the company bears the liability to pay the FI (Financial Institution) on time, otherwise the FI (Financial Institution) would levy an interest on late payment. Thus, the risk of realisation remains with the company discounting its bills.
Example of Bill Discounting
A business owner sells goods worth Rs. 30,000 to Mr. A on credit, with an agreement that Mr. A will pay after three months. However, the business owner is in urgent need of funds and cannot wait for the full payment period. To address this, the business owner decides to discount the bill with the bank, which offers a discount rate of 10% per annum. After discounting the bill for three months, the business owner receives Rs. 28,250 from the bank, after paying a commission of Rs. 1,750 for the service.
Bill Discounting Interest Rate
Interest Rate on Bill Discounting may vary from lender to lender, as the Discounting Charges serve as the profit for the Financial Institution. Nonetheless, the Financial Institution may impose a penalty interest if the borrower does not repay the credit extended within the designated period.
List of Leading Banks/NBFCs offering Bill/Invoice Discounting
| Banks/ NBFCs | Min. Interest Rates | Details |
|---|---|---|
| Axis Bank | 9.30% – 10% | Apply Now |
| Kotak Mahindra Bank | 9.15% – 9.50% | Apply Now |
| Deutsche Bank | 9.15% – 9.30% | Apply Now |
| ICICI Bank | 9% | Apply Now |
| Tata Capital | 11% | Apply Now |
How does Bill Discounting work?
There are 3 parties in the Bill Discounting process-
1. Drawer- A drawer is a Seller or a company that sells goods or services to its clients and is entitled to receive money at a later date. A drawer is the maker of the bill of exchange.
2. Drawee- A drawee is a Buyer of goods and services, liable to make payment in the future against that. Thus, a drawee is a debtor of the drawer upon whom the bill of exchange is drawn.
3. Payee- A payee is an entity to whom the payment must be made. When the drawer discounts the bill with a bank or NBFC, the Bank or NBFC becomes the payee.
Process of Bill Discounting
The process of the Bill Discounting system is as such:
- First, a transaction takes place between a company and its client. The client may at times only pay partly or upon the delivery of the order. In such a case, the company would create a bill of exchange upon its client to make payment at a later date.
- The company if in need of funds may choose to discount this bill with a Bank or NBFC. In that case, it would seek an NOC (No-Objection Certificate) from the buyer to discount the bill.
- The Bank or NBFC would then check the authenticity of the bill and check the credit rating of the company. In most cases, lenders avoid discounting bills of companies that are not rated.
- If the Financial Institution deems the company credit-worthy, it would open an escrow account and give an advance of an amount less than that of the face value of the bill (upto 90%). The difference between the face value of the bill and the advance given is the commission of the Financial Institution or the Discounting Charges.
- Once the drawer of the bill (company) gets the payment from its client, it pays back the Financial Institution the whole sum. In case the client fails to make payment, then the liability to repay the Financial Institution remains with the drawer, failing which, interest on late payment would be levied by the FI.
Features of Bill Discounting
The Bill Discounting process has the following features that make its characteristics unique-
1. Short-term Finance: Bill discounting is a short-term financing mechanism with a maturity period ranging from 30 days to 120 days. The Financer is repaid as soon as the client of the business discounting a bill makes the payment.
2. Discounting Charges: The Financer usually levies Discounting Charges on the bills discounted that serve as the commission or profit for them. It is the difference between the face value of the bill discounted and the credit offered against it.
3. Credit Rating is Crucial: Generally, Financial Institutions avoid discounting the bills of entities that are not credit rated. Thus, a good credit rating of an enterprise is crucial for better discounting terms and quicker sanctions.
4. Escrow Account for Payment: Usually, an Escrow Account is opened for the credit disbursal as well as the repayment. This is done after the Financer deems the bills authentic and NOC has been obtained from the client (drawee of the bill) of the business.
What are the types of Bill Discounting facilities in India?
There are majorly 3 types of Bill Discounting facilities available in India-
1. Sales Bill Discounting
It is the process of discounting a Sales Bill in order to avail cash quickly so as to not let the delay in payment hamper the day-to-day functioning of the firm. It is usually done by the seller so as to get cash for buying raw materials for order fulfilment.
2. Drawee Bill Discounting/Purchase Bill Discounting
Drawee Bill Discounting is a Bill discounting system offered to a drawee, ie. the Buyer. It is also called Purchase Bill discounting and allows the purchaser to discount the bill of exchange to pay its suppliers. Once the life cycle of a product is complete and the drawee receives cash, the Discounting Institution is repaid.
3. Letter of Credit or LC-backed Bill Discounting
It is the process of discounting a bill of exchange backed by a Letter of Credit facility from the buyer’s bank/financial institution. The seller in this case ships the goods and asks the buyer to open a negotiable Letter Of Credit Facility with their bank/financial institution to secure the payment.
The Letter of Credit issuing institution then allows the letter of credit facility to be used by the buyer’s advising institution. The buyer then discounts the bill with a Bank/NBFC backed by the acceptance of the LC issuing institution.
Advantages of Bill Discounting
Benefits to Vendors
- They can enjoy improved working capital and cash flow without balance sheet disturbances.
- Low or NIL security/guarantee
- Quick and convenient access to credit
- They can enjoy higher loan amounts as the margin requirement is typically much lower than other credit facilities.
Benefits to Purchasers
- Benefit from improved negotiations with vendors and suppliers
- Optimises supply of raw materials
- Relationship with value chain partners gets strengthen.
Disadvantages of Bill Discounting
- Reduced Profit Margins: While Bill Discounting offers fast cash, it comes at a cost. Banks or NBFCs charge a fee to discount the bill, which can reduce the company’s overall profit margins. Businesses must weigh the cost of this service against its benefits to ensure its financially sustainable.
- Meet Eligibility Criteria: Small entities may not fit into the eligibility criteria of the lenders. However, businesses can overcome this demerit by building a steady track record, instilling confidence among financers.
- Increase in Cost: The financers charge a huge fee for providing invoice discounts. This will increase the business cost.
Eligibility Criteria
Financial Institutions deploy the following criteria to determine the eligibility of a borrower-
- Credit Rating– Financial Institutions prefer discounting the bills of businesses with a good credit rating.
- Business Vintage– Usually businesses which have been in existence for at least 2-3 years find it easier to discount their bills as compared to newly established ones.
- Business Turnover– Financial Institutions discount bills of businesses with a turnover of at least INR 1 crore. In case of trading businesses, the turnover threshold is around INR 4-5 crores.
Also Read: Business Loan eligibility criteria in India
Documents required for Bill Discounting
The following documents are required to discount a Bill-
- A Bill of Exchange (Purchase/Sales Bill)
- Bank Statement of the past 12 months.
- GST Returns.
- Income Tax Return (ITR).
- Logistics Bill and Transportation details.
- Business PAN Card.
- Business Address Proof.
- Business Registration Certificate.
- Aadhar Card.
- No-Objection Certificate from the Client.
- Letter of Credit in case of LC-backed Bill Discounting.
- Any other document that the Financial institution may require.
Benefits of Bill Discounting
Bill Discounting has several benefits that make it the go-to financing option for businesses; some of which include-
- Quick Cash-in-hand– Bill Discounting process is relatively fast when compared with other means of financing, and because of that, it is opted by businesses in a recurring manner.
- No Collateral required– There is no collateral required to discount a bill and the bill itself acts as a proof of income receivable at a later date. This is beneficial for a borrower since it keeps the assets of the business insulated.
- No increase in liability of the business– The discounting process does not lead to additional debt on the business and is an off-the-book process. Thus, it makes no change to the balance sheet of the business.
- Enhances Cash flow– Bill Discounting aids in enhancing the cashflow of a business by ensuring that cash is not locked up in assets while there are current liabilities to be covered.
Difference between Bill Discounting and Purchase Order (PO) Financing
| Particulars | Bill Discounting | PO Financing |
|
Timing |
Any business that sells products or services uses bill discounting once the invoice has been dispatched. |
Businesses that sell tangible goods opt for purchase order financing before a specific product is sold |
|
Parties Involved |
The parties involved are – seller, customer and financier. |
The parties involved are – buyer, supplier and financier. |
|
Purpose |
It helps to meet cash flow requirements instantly. |
It helps to complete large orders quickly. |
How is Bill Discounting different from a business term loan?
Bill Discounting can be differentiated from business term loans based upon the following criteria-
| Criteria | Bill Discounting | Business Term Loan |
| Collateral Requirement | No Collateral required | May require collateral |
| Effect on Balance Sheet | No effect on Balance Sheet | Creates a liability in the balance sheet |
| Number of Parties Involved | More than two parties involved | Usually two parties involved—Borrower and Lender |
| Tenor/Maturity | Short-term | May be short-term or long-term |
| Processing Time | Quick processing time | Longer processing time |
Factors affecting the Discount Rates
The discount rates offered by lenders on bill discounting shall depend on various factors such as:
- Financial History
- Business Tenure
- Business Stability
- Business Vintage Periods
- Business Volume
- CIBIL Score
- Early Payment Period
- Creditworthiness
When Should We Go For Bill Discounting?
The situations under which bill discounting is proven beneficial are mentioned below:
- Seasonal Demand: Businesses experiencing seasonal demand may resort to bill discounting in order to manage their working capital during periods of sluggish sales.
- Expansion: A company that is experiencing rapid growth requires a larger sum of capital to facilitate its development. Bill discounting offers a rapid method to obtain funds without raising the debt amount.
- Prolonged Payment Terms: Any company working with clients who have lengthy credit terms, such as 90 days, may utilize Invoice discounting to safeguard against cash flow disruption.
- Supplier Payments: Bill discounting allows companies to settle supplier invoices promptly, taking advantage of early payment discounts or maintaining positive relationships with suppliers.
Why is OneNDF’s Bill Discounting platform Good for You?
OneNDF has access to all the platforms that offer bill discounting facilities. A user can benefit by knowing which Lender/Platform is best suited for his needs through OneNDF.
Bill Discounting is a boon that passes unnoticed by many people, especially the MSMEs who don’t have assets to use as collateral. In turn, with a few open invoices, a company can utilize its potential to satisfy any immediate liquidity requirements and swiftly raise cash. This certainly impacts the efficiency of order processing by a company and their relationship with the customers also.
Are you thinking about bill discounting for your company? Get full solutions at OneNDF. Reach out to our experts and discover how to get the most of your cash flow. Take your business to the next level. Don’t let late payments hold you back—boost your business with bill discounting from OneNDF and maintain your competitive edge.
Conclusion
A Bill Discounting system is a blessing oblivious to many, especially MSMEs that may not possess assets to pledge as collateral. With multiple outstanding bills, a business could utilise their potential to fund its short-term requirements and get cash in a jiffy. This invariably plays a role in the efficiency of a company’s order fulfillment and its relationship with the customers.
As opposed to term loans that must be repaid in installments, a Bill Discounting system doesn’t put a strain on the cash flow of a business. To businesses with higher profit margins, the Bill Discounting system could even be a part of their daily operations.
FAQs
1. Is LC-backed Bill Discounting secured or unsecured?
LC-backed, or Letter of Credit backed Bill Discounting is an unsecured bill discounting wherein the buyer’s bank takes upon the liability to pay the seller using the Letter of Credit instrument if the buyer is unable to make the payment on the specified date.
2. What is Invoice Discounting?
Invoice Discounting refers to discounting unpaid invoices with a Discounting Institution, that must be repaid within 90 days. The Discounting Institution does not usually discount the full order value of the invoices.
3. What is the difference between Bill Discounting and Bill Purchase?
While in Bill Discounting a Bank/NBFC gives you an advance against your outstanding bill, in Bill Purchase or Bill Factoring, they buy your outstanding bills along with the risk of default by the drawee of that bill. Along with that, the responsibility to realise the outstanding amount is also transferred in a Bill Purchase/Bill Factoring.
4. Why is bill discounting Important?
Bill discounting allows businesses to unlock the value of their outstanding invoices and helps them access working capital easily, making it important for efficient functioning.
5. What is another name for Bill Discounting?
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