Why Bill Discounting?
Vendor Factoring is a form of bill finance in which you, as a business owner, can sell unpaid bills to a third-party company, known as a factoring company. When you sell an bill to a factoring firm, the company will pay you a portion of the overall bill amount and, in most cases, will take complete responsibility for collecting payment from your buyer on your behalf.
This financing technique will assist your company in maintaining a steady cash flow before the buyer pays for the items or services you provide.
Bill Discounting Process
There’s a specific process associated with bill discounting. Here’s an overview of the generic bill discounting process.
- A business provides good or service to a buyer and produces a bill.
- The bill is sent to the buyer who accepts it & assures to pay within the due date and as per payment terms.
- The seller, however, is in urgent need of some liquidity and approaches a financial institution with the invoice for bill discounting.
- The institution checks the veracity of the bill thoroughly and determines the creditworthiness of the buyer.
- Once everything is sorted, the institution offers funds to the buyer after deducting a certain amount or fee.
- The seller accelerates the bill payment and rejuvenates its cash flows. The bill discounting process has the bill or invoice as the collateral involved.
- The payment for the unpaid invoice will be collected by the financial institution from the buyer.
Bill Discounting by Yubi
Benefits of Bill Discounting with Yubi
Bill discounting benefits businesses, banks, finance companies, and investors.
Further, businesses benefit by rejuvenating their cash flow, stabilising growth, and funding business expenditures.
The primary benefits are:
- Improved cash flow: Businesses can easily rely on this quick financial aid to access speedy funds and continue to flourish. This process quickens money inflow— profiting the organisation by helping them expand, develop, etc.
- Instant access to cash: Bill discounting is an efficient and fast way to assess working capital, as the process is hassle-free and involves minimal documentation.
- Collateral not required: There is no requirement to keep any asset as security as the unpaid bill is considered collateral.
- Debt not incurred: Bill discounting also helps save tax liability, and the chances of loss/damage are almost nil compared to conventional financing frameworks.
- Balance sheet not impacted: It does not impact the business’s balance sheet as it is an off-the-book process.
Features of Bill Discounting Model
Evaluation of creditworthiness
Lending institutions scrutinise the creditworthiness and credit history of both the buyer AND the seller. The credibility, financial health, and even market presence & reputation are investigated to reduce the risk of non or late payment.
Preferred Banking Partner
A good, long-term relationship with the banking partner or lending institution streamlines and speeds up the entire process. The more reputed the parties involved and the better the standing between the buyer’s & seller’s banks, the quicker the cash exchanges.
Inter Bank Dealing
The process of bill discounting occurs primarily between the buyer’s & seller’s banks. The payment terms & discounting terms are agreed upon during these interbank dealings.
Usage of Bill
The issuance date of a bill is the period between the permitted bill time and the payment due date. It indicates the period for which the bill is usable.
How does the Bill Discounting process work?
Step 1: The seller sells the goods on credit and raises the bill on the buyer.
Step 2: The buyer accepts the bill and acknowledges paying on a specific due date.
Step 3: The seller approaches the financing company to discount it.
Step 4: The financing company assures itself of the legitimacy of the bill and the buyer’s creditworthiness.
Step 5: The financing company avails the fund to the seller after deducting the appropriate margin, discount, and fee per the norms.
Step 6: The seller gets the funds and uses them for further business.
Step 7: On the due date of payment, the financial intermediary/ seller collects the money from the buyer. The collection is done based on the agreement between the seller and the financing company.
Bill Discounting Rate of Interest
The rate of interest offered by financial institutions on bill discounting depends on the following factors such as:
✓ Business stability
✓ Financial history
✓ Business volume & tenure
✓ Applicant’s credit score
Factors that Affect the Eligibility
Chief factors that influence the eligibility of a bill discounting transaction are:
- The credibility and creditworthiness of the buyer & seller
- Business vintage periods
- Financial stability of the businesses involved
- The buyer’s repayment history, financial capability, business volume and turnover
- The net worth or profitability of both businesses
- Credit score of both businesses
- Any history of loan or payment defaults
Documents Required for Bill Discounting
Essential documents necessary to get approval of a bill discounting facility are:
- Bill discounting application form duly filled with necessary photographs
- PAN card and address proof of the business seeking the credit facility
- Aadhar card of the credit applicant
- GST return filings
- ITR and audited balance sheets, profit & loss & other financial statements
- The business’s establishment Proof
- Last one year’s bank statement
- The bill of exchange
- A letter of credit
- The commercial invoice/s to be discounted and the packing list detailing the consignment delivered
- Logistics details along with a copy of the delivery note, if available
- The transport documents
- Licenses, registrations, permits, and necessary certificates
Why is Yubi’s Bill Discounting platform good for You?
Yubi’s Yubi Flow platform provides businesses with quick access to working capital. Such a platform allows businesses to use unpaid bills as collateral to get instant working capital for their business growth & expansion.
Yubi Flow by Yubi is an end-to-end Trade and Supply Chain platform. It is the most advanced Trade and Supply Chain Finance platform that has the following offerings:
Vendor Finance Solutions: Sales bill discounting, sales billing discounting, and purchase order finance.
Dynamic Discounting Solutions: Vendor bill pre-payment via the investible surplus from anchor
Anchor Financing Solutions: Purchase bill financing/purchase bill discounting, purchase order finance, and sales bill financing/sales bill discounting.
Dealer Finance Solutions: Purchase order finance, Purchase invoice discounting/purchase bill discounting.
Bill discounting offers the following benefits:
✓ Availability of Instant Cash
✓ Easy withdrawals
✓ Flexibility in repayment
✓ Interest-only on the used amount
✓ Easy authentication
✓ Quick processing with hassle-free documentation
It is unsecured or collateral-free, and your assets will not be on the line in situations as an unfortunate case of non-repayment. Instead, bill discounting is an efficient, quick, and easy way to improve the cash flow of your business.
Yes, it can be considered to be a loan or credit facility availed by businesses for short term financial assistance.
Absolutely. Non-banking financial institutions offer a wide array of different bill discounting facilities.
It is the credit period agreed upon between the buyer and seller.
Either the seller or the lending institution offering the bill discounting services collects the payments due.
No, they are not applicable.
Eligibility criteria varies from one institution to another. For the generic criteria applicable, please go through the appropriate section of this article.
No, it is not. The seller does not make any initial protection payment to cover for the credit risk involved.
Yes, but the upper sanction value varies across the different loan products on offer.
Funds are credited generally within 10 to 15 days of the approval date.
Yes, it is akin to a short-term loan that a business in need of some quick liquidity can avail.
Advantages include boost to cash flow & liquidity, immediate availability of funds, easy disbursal of funds, wide variety of options available, no need for any asset collateral, and lower charges.
Disadvantages include risk of non-payment, credit fraud, buyer bankruptcy, etc.
A typical example can be as follows:
- Seller sells goods to a buyer and generates an bill.
- The bill has a 30-day payment period. But the seller has an urgent need of some quick funds for certain immediate capital purchases.
- The seller approaches a lender to avail their bill discounting service.
- The lender goes through all documents, checks the eligibility, credibility, business reputation, financial health & credit history of both the buyer & seller.
- A certain percentage of the bill amount is then disbursed to the seller within a short amount of time.
When the buyer makes the payment, the seller sends the entire amount to the lender who then disburses the rest of the bill amount minus some fee, charge or interest.
Bill discounting can be classified into bill discounting backed by a letter of credit, clean bill discounting, drawee bill discounting, and invoice bills discounting.
In the case of bill purchasing, the lender credits the entire amount to the seller’s bank account once the purchase is made. This is unlike bill discounting where a certain percentage of the bill amount is disbursed.