Types of Bill Discounting in India – What is Bill Discounting? | Bill Discounting vs Factoring

Bill Discounting

In this article, we will discuss types of Bill Discounting in India available but before diving into the types let’s understand bill discounting in brief.

Bill Discounting is a new way of encashing your unpaid bills from a financier to meet fund requirements for working capital. Businesses can keep the bills as collateral with the financier. In return repay the credit once they receive the money from their customers at a low-interest rate of 1% pm.

Alternatively, it’s a short-term loan extended by a financier known as invoice discounting companies using your unpaid invoices as security. Once the invoices get paid by your customer in a trust account operated by these companies. Consequently, they will deduct the fee or interest agreed for that period and refund the remaining amount into your account. Nowadays, retail investors also use digital platforms for extending short-term loans to these businesses for reaping quick profits on the receivable exchange of India.

Also Read What is Invoice Discounting Investment in India? – Return & Risk Analysis Stocks in India

Types of Bill Discounting in India

Advertisement

Let’s get into the main topic of types of bill or invoice discounting:

1) Confidential Invoice Discounting: As the name suggests this type ensures the confidentiality of the business arrangement that happened between financier and vendor. In addition, your customer will not get to know that you get into any arrangement with invoice discounting companies. As a result, you get your unpaid invoices encashed up to a certain %. This helps you to meet the cash flow requirement in running a day-to-day business.

It’s a good option for businesses that sell their product and services to clients. However, at times delayed payments or nonpayments make other businesses suffer even though products or services are rendered. At the same time, it does not affect the relationship with your customer and does not require lots of negotiation.

2) Whole turnover invoice discounting: Under this type of discounting method, businesses can avail loans on each invoice generation. Hence, categorically it will be termed as funds raised on total turnover irrespective of business need. This would be beneficial if few of your customers do not have good creditworthiness in the market.

3) Selective Invoice Discounting: In this type, only selective customer invoices are put as security for raising funds. Under this, businesses have got the flexibility to raise funds depending upon the business need against selling individual or group of invoices at a time.

As it’s an individual invoice financing you tend to get more advances. But with this method, the lender’s risk depends on your customers rather than on your business. This is more suitable for an established business that deals with creditworthy customers.

Also Read List of Government Bonds in India – Short-Term and Long-Term Bonds

Bill Discounting vs Factoring

At times we are not sure about the difference between Bill Discounting and Invoice factoring. So in this para, I’m going to clear doubts when you come across both terms. As discussed, Bill Discounting is a way of enchasing your outstanding invoices by keeping them as collateral with invoice discounting companies. However, the credit-control still lies in your hand. The financier will extend the loan up to a certain percentage depending upon your credibility. However, will not chase your customer to pay the invoices within time.

On the other hand, Invoice factoring means you sell your unpaid invoices to a factoring company to improve the cash flow and to maintain revenue stability. The factoring company pays you most of the invoiced amount immediately. Therefore, collects the payment directly from your customer on your behalf. Hence, it passes a benefit to the business of chasing their unpaid invoices as it’s a very stressful job at times on the account department part.

Invoice factoring should be used when most of the times invoices get overdue leading to cash flow issues. As factoring company will take care of chasing your customer and getting the outstanding invoices cleared and you can concentrate on expanding your business.

Also Read Sovereign Gold Bond : Best Returns on Gold Investment

Major Difference

Advertisement

Bill discounting is re-course in nature that means if your buyer defaults in payment. Hence, the payment has to be made by you. However, in the case of factoring, you have the option to choose re-course and non-recourse.

In bill discounting, the financier gets the discounting charges for the loan extended whereas in factoring the company gets interest along with its commission.

Moreover, in the case of factoring, debts are assigned which is not in the case of bill discounting.

Alternatively, Bill discounting means, you sell your unpaid invoices at a discount to a financier in exchange for the funds. On the other hand, selling of the debtors to factor at a discount is term as factoring.

Bill discounting for medium or small scales businesses and factoring is suitable for large-scale organizations.

Also Read IPO vs Shares(Listed) – Difference between IPO and Listed Stocks in India

Advantages

Here are a list of advantages of bill discounting offers to a business

1) It accelerates cash flow to meet the day-to-day business need.
2) Other than outstanding invoices no collateral or security is required to avail this type of financing.
3) Available to big and small-sized businesses in case they have been denied traditional bank loans in the past.
4) It’s a flexible finance solution as a basis the need one can finance the unpaid invoices
5) Acts as a solution to slow payments. The funds can be used for running day-to-day activities. Thereby, providing necessary capital for business growth.
6) Offer confidentiality as customers don’t get to know this finance arrangement.

Also Read Applying IPO Online using SBI YONO Lite | Eligibility | New User Registration | Cut-off price | IPO Allotment

Disadvantages

Advertisement

Every coin has two sides in a similar fashion if something offers pros then comes with cons also. Bill discounting is not suitable for all types of customers so before considering this option please refer to the disadvantages also:

This results in decreased profits as you end up paying interest with a processing fee.

Quite volatile in nature as partial or full funding for current accounts receivables which could be inadequate if you’re looking for a business loan.

Applicable only on commercial invoices. Hence not suitable for the companies dealing with the general public.

Some stakeholders may not like the idea of invoice discounting as it’s a stigma over the company hence excessive dependence is not good for the long term.

Also Read What is SME IPO? | SME IPO Vs Regular IPO | How to Invest in SME IPO? | Sell SME IPO Shares |

Hope you like the article, in case you feel something unclear please feel to contact us!

Advertisement
error: Content is protected !!