Bill Discounting Facility for Indian SMEs

While the vast numbers of Indian SMEs lack the liquidity required to purchase the products or raw materials required to complete additional export orders, overseas buyers frequently prefer to have a credit term, which means that the company's working capital will be locked up in bills for an extended period of time, rather than cash.

Known as working capital finance, it is a short-term financing alternative that allows businesses to handle their financial demands until they receive payment from foreign customers. A kind of working capital finance for exporters, bill discounting (also known as invoice discounting or invoice factoring) is a type of financing known as invoice factoring.

What is the procedure for bill discounting?

Consider a bill of exchange passed by ABC Company to its customer, XYZ Company. ABC Company agrees to settle the unpaid debt in order to use the income sooner rather than later. This is one of the straight paths to learning how bill discounting works.

To do this, ABC contacts a bank and offers to sell the bill for 90% of its par value. The bank does thorough research on the transaction and determines its viability.

ABC gets 90% of the bill's face value upon approval and tells XYZ Company to pay the bank. The agreement is declared closed after the bank gets full payment from XYZ.

Why choose Bill Discounting in India?

Bill Discounting is an excellent match for your working capital financing requirements if you have exhausted or are unable to get credit limits from banks. More leads for export orders are lined up, but you lack the resources and money to fulfil them.

This might be due to a lack of collateral or lengthy procedures or because your buyers are requesting a longer credit term, and accepting their request for more time would result in a cash crisis.

A collateral-free and rapid working capital solution, such as Bill Discounting, may significantly aid in the growth of your export firm's sales by fuelling cash flow, which is the lifeblood of any growing export business.

The bill discounting process takes many factors into account

Before deciding to engage in a bill discounting transaction, a financial institution will evaluate a number of considerations. One relates to the degree of risk associated with the transaction.

This often entails assessing the debtor in question to ascertain the likelihood that he or she would pay the bill late or maybe fail on the obligation entirely.

The remaining time before the bill is due is also taken into account, with institutions preferring a shorter time period between purchasing the instrument and collecting full payment.

Assuming the financial institution judges that the level of risk is acceptable, the transaction may be completed, and the bill of exchange's originator reimbursed with an agreed-upon proportion of the bill's total par value.

What is factoring and reverse factoring in bill discounting?

On the TReDS platform, there are two ways to discount a bill: Factoring and Reverse Factoring. Both strategies are intended to accelerate and improve cash flow while maintaining a healthy balance sheet.

Factoring is a sort of debt or financing in which a firm sells its accounts receivable (i.e., invoices) to a third party (referred to as a factor) at a discount.

The benefits of factoring include optimising working capital, credit protection against bad debts, the absence of collateral, and timely payment of your bills.

Reverse factoring, also known as supply chain finance or supplier financing, is a financial technology solution that helps buyers and suppliers maximise working capital by mitigating the negative consequences of extended payment periods.

The advantages of reverse factoring include Increased cash flow, less costly payment demands, cheap interest rates, and the development of long-term ties.

Conclusion

It will be necessary to enter into a contractual agreement with both the seller and the buyer of a business bill as a part of the bill discounting method. It is customary for contracts to specify what percentage of sales proceeds will be paid to the seller and to contain clauses that safeguard the buyer in the event that the bill is not paid with respect to the terms of the contract.

The introduction of late penalties or other costs, as well as the eventual holding of the seller accountable for the entire payment of the bill discounting obligation, may be necessary if the debtor fails to make good on the outstanding amount.