Invoice discounting also called Bill Discounting is a way in which a company can borrow short term funds from banks or financial institutions based on their outstanding invoices. Invoice Discounting is a manner in which businesses can raise short-term funds to meet short-term liquidity needs. Invoice Discounting is an alternative to a business loan or an overdraft facility. Under Invoice Discounting, the company provides the unpaid bills to the banks or financial institutions and in return, receives funds up to 90% of the outstanding bill value. It helps keep cash inflow from customers constant and they can pay within their normal credit period.
Invoice discounting platforms work like matchmaking services for Businesses with Invoices and Investors seeking alternative financing solutions with high returns. Such platforms host a range of Investors from Individual Investors to Banks and NBFCs. Discounting platforms serve this purpose as the tenor for this facility generally range from 30–90 days.
How Invoice Discounting works?
- A company sells a product or performs a service for a client.
- The supplier sends the client an invoice with a payment deadline of 120 days.
- The invoice is subsequently sent to a third party, which is commonly referred to as a finance firm.
- The account receivable is purchased by the finance firm from the company. Funds are made accessible at 80% of the invoice’s face value.
- When a consumer pays an invoice, the remaining balance, less a service charge, is sent to the firm.
Types of Invoice Discounting
When it comes to invoice discounting, there are a few types that you can choose to maintain a steady flow of working capital.
- Whole Turnover Invoice Discounting
With this type of funding against an invoice, every invoice that a business generates across the turnover is discounted to raise funds, irrespective of the needs of the said business.
- Confidential Invoice Discounting
Like its name suggests, with this type of financing, the entire process is carried out in confidentiality. It means that suppliers or customers of a company are unaware of the business raising capital against invoices before payment is received.
- Selective Invoice Discounting
Spot factoring or selective invoice discounting are some of the examples where single receivable invoices are sold to third parties to raise capital. These are the three principal types of invoice discounting which help companies acquire working capital for their businesses without hassle.
Features of Bill Discounting
1. Credit Evaluation
A bank will consider the goodwill of the seller as well as the past payment records of the buyer who needs to pay to the bank.
2. Banking Partners
The buyer, who is partnering with a good bank, and has a Good Credit Score, will ensure your bank that the paying party is reliable. The endorsement from the buyer’s bank will work in your favor.
3. Bank to Bank Dealing
Invoice financing transaction happens between banks where the buyer’s bank doesn’t need to intimate the seller of the reimbursement instruction. It deals, directly, with his bank, to determine the discounting terms.
Documents Required for Bill/Invoice Discounting
- Duly filled application form with passport-sized photographs
- Business PAN card and address proof
- Applicant’s Aadhar card
- Business Establishment Proof
- Last 12 months’ bank statement
- Bill of Exchange
- Letter of Credit
- Commercial Invoice
- Packing list with all the details
- Logistics details with delivery challan, if any
- Proof of certificates, registrations, licenses, and permits, if any
- Any other document required
Benefits of Bill Discounting
- Effortless withdrawals
- Flexible repayment tenure
- Strengthened cash flow
- Interest to be paid only on the used amount
- Easy authentication
- Quick processing with hassle-free documentation
- The business should be a minimum of 10 months old
- Should have dealt with at least 2 large-scale corporate
- Credit score should be 650 or more
- The business ought to have a base turnover of 25 lakhs
Advantages of Bill Discounting
Bill discounting is advantageous to businesses, banks, finance companies, and investors. Businesses benefit by rejuvenating their cash-flow in-turn helping them stabilise growth and fund business expenditure.
- Cash flow: Businesses being dependent on the cash flow to sustain their business can easily rely on this quick financial aid to access speedy funds and continue to flourish. This process quickens money inflow profiting the organisation in expanding deals, seeking after development, securing hardware, etc.
- Instant access to cash: Bill discounting is a more efficient, faster way of assessing working capital as it is hassle-free and does not involve lengthy documentation procedure.
- No collateral involved: There is no requirement to keep any asset as security as the unpaid invoice is considered as the collateral itself.
- No debt incurred: Bill discounting helps in saving tax liability. The chances of a company suffering any loss or damage are almost nonexistent when compared to conventional financing frameworks.
- No impact on business sheet: Bill discounting service does not impact the balance sheet of the business as it is an off-the-book process
Disadvantages of Bill Discounting
- Invoice discounting reduces the investor’s gross profit margin as the bank deducts a huge amount as a fee while discounting bills.
- Most of the financial institutes discount only commercial bills.
- It cannot be thought to be a long term solution for finance as is only a source of short-term fund arrangement.
- New businesses might not be eligible.
Invoice Discounting vs. Invoice Factoring
Both invoice factoring and invoice discounting are financial services that allow you to access the funds contained in your outstanding invoices. As a result, a supplier who decides to advance money in the face of overdue debtor balances is considered a risky business. Smaller companies, such as a startup or a small enterprise, use factoring. Larger and more respected companies take invoice discounting into account.
The key distinction between these two is who is in charge of the sales ledger and who is responsible for payment. The following sections will discuss the differences in greater detail: The provider takes over management of the sales ledger with invoice factoring. Credit control and following consumers for invoice settlement are some of the other tasks.
Bill Discounting Rate of Interest
The interest rate offered by financial institutions on bill discounting depends on factors that include business stability, financial history, business volume, business tenure, applicant’s credit score, or creditworthiness along with his/her financials.
Business becomes more competitive for buyers and Sellers as they get to enjoy a much lower rate of interest on TReDS platform. Varying from 5% to 8% as opposed to market standard of 15% to 24% PA.
5 Things Investor should know about Invoice Discounting
Here are 5 things you should keep in mind:
- Higher the return, higher the risk
- In case of a default, business owes the responsibility of Repayment
- You can invest in Invoice Partially
- Be aware of Fees
- There is no prepayment penalty
Top 3 Financial Institutions offering Bill Discounting
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Omozing helps make Smart Money Moves for a Lifetime. They strive to get lowest interest rates and best terms for your Online Applications at www.Omozing.com . We’ve made business lending smarter, faster and easier by transforming the approval process from stumbling blocks to stepping-stones. This enables borrowers to not just get access to capital, but also understand what areas they need to work on in order to enhance their credit profile. Omozing ensures that Borrowers get a secure, safe and reliable application process that be tracked online.
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3. ICICI Bank
ICICI Bank is a leading private sector bank in India. It caters to individuals, startups, as well as existing businesses and offers business loan interest rate from 18% onwards per annum.
How to Use Discounting Invoices?
The first step is to select whether or not you wish to discount your whole accounts receivable ledger, often known as full turnover invoice discounting. Selective invoice discounting, on the other hand, is the practise of discounting only a few specific invoices. It’s important to remember that selective invoice discounting isn’t always accessible for small firms. Because invoice discounters seek to spread their risk as broadly as possible, this is the case.
After that, call a few invoice discounting companies and compare their services and costs. Inquire about their customers’ references if feasible. In most circumstances, these will be anonymous, but they may be helpful in determining which firm to hire.