Bill discounting process
The process of bill discounting involves the following steps:
- MSMEs and supply chain finance entities raise invoices for goods supplied or services rendered
- The seller approaches a lender to monetise these unpaid invoices through invoice discounting
- Upon approval, the lender provides funds within a few working days at a discounted rate
This streamlined process ensures that MSMEs can maintain their working capital cycle without disruptions.
Example of bill discounting
Consider a stationery supplier who delivers goods worth Rs. 1,00,000 to ABC Corporation, with a 30-day payment term. If the supplier needs funds before this period, they can approach a bank with the invoice and get a discounted amount.
For example:
- Invoice amount: Rs. 1,00,000
- Discount rate: 5%
- Discount charge: Rs. 5000
- Amount received: Rs. 95,000
The bank collects the full invoice amount from ABC Corporation after 30 days. This transaction benefits all parties and highlights the practicality of bill discounting or invoice discounting.
Eligibility criteria for bill discounting
To avail the benefits of bill discounting, businesses must meet the following eligibility criteria:
- The seller and buyer must have a documented agreement detailing the payment terms
- The seller must provide a valid invoice raised against the buyer for the pending payment
- The invoice must specify a fixed due date agreed upon by both parties
Meeting these criteria ensures a smooth and efficient discounting process.
Features of bill discounting
Key features of bill discounting include:
- Evaluation of parties: Financial institutions assess the reputation of the seller and the buyer’s creditworthiness to minimise risk
- Immediate cash availability: Sellers receive funds instantly after the invoice is discounted, enabling uninterrupted business operations
- Discount charge: The difference between the invoice’s face value and the amount disbursed by the institution is calculated at a specific rate
- Maturity period: Payment terms typically range from 30 to 120 days, based on the agreement
These features make bill discounting a flexible and efficient financial solution.
Bill discounting rate of interest
The discounting rate varies based on several factors, including:
- Financial history and credit score of the seller
- Business experience and industry stability
- Creditworthiness of the buyer
- Business volume and transaction frequency
Banks and NBFCs evaluate these aspects to determine a fair discounting rate, ensuring equitable terms for all parties.
Documents required for bill discounting
The following documents are generally needed for bill discounting approval:
- Application form with photographs
- Business PAN card and address proof
- Aadhar card of the applicant
- GST returns and income tax statements
- Financial statements with audit reports
- Business establishment proof
- Bank statements for the last 12 months
- Bill of exchange
- Commercial invoice and letter of credit
- Delivery note and packing list with required details
- Proof of certificates, registrations, licenses, and permits
Submitting these documents ensures a seamless and hassle-free discounting process.
Benefits of bill discounting
Bill discounting offers numerous advantages, including:
- Improved cash flow: Businesses can inject funds into their working capital cycle, ensuring smooth operations
- Instant access to cash: Sellers receive payments quickly, enabling better financial planning
- No collateral required: The invoice itself serves as security, simplifying the process
- Debt-free financing: Sellers access their receivables without incurring additional debt
- No impact on balance sheets: Since it is an off-the-book transaction, it does not affect the business’s financial statements
These benefits make bill discounting an attractive option for businesses of all sizes looking to strengthen their working capital position.
Conclusion
Bill discounting is an invaluable financial tool for businesses seeking to manage cash flow efficiently. By leveraging unpaid invoices, companies can maintain their working capital and sustain growth. For businesses needing additional financial support, a Bajaj Finserv Business Loan offers competitive business loan interest rates and flexible terms to meet diverse requirements.
Take control of your business’s financial future with bill discounting and tailored solutions like the Bajaj Finserv Business Loan. Apply today and unlock your growth potential!