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What is Invoice Discounting in Banking?

When you avail immediate cash against your credit invoice from a lender, it is known as bill discounting. Banks, NBFCs, and other financial institutions can offer this facility to businesses of all sizes. However, it is essential to note that the lender will not pay the entire value of the invoice rather a percentage of it. 

Features of Invoice Discounting

Listed below are some of the top features of the bill discounting facility:

  • Instant Access to Cash

When you opt for invoice discounting, the lender will offer cash on your credit invoices issued. This way, you get the cash that would otherwise be tied up in receivables.

  • Flexibility in Interest Rate 

Like any other credit facility, the lender levies an interest rate on the amount you receive via the invoice discounting facility. While the interest rate is generally higher, it is levied on the amount you receive against your invoices and not the entire amount.

  • Maturity Period

Maturity period is the period until your credit invoice is due for payment. This can vary depending on the terms agreed upon while opting for the facility. Generally, the period can range from 30 days to 120 days, i.e., 1 month to 4 months.

  • Different Forms of Invoices

You can offer invoices to the financial institution in various forms – with and without resources. For the former, the lender will check and verify all the documents. For the latter, the lender will not check any documents.

How Does Invoice Discounting Work?

In simple terms, bill discounting is a short-term credit facility that you avail by keeping your credit invoices as security. The lender will give you a certain percent of the invoice value in advance. 

When the customer pays the invoice, the excess amount received by the lender is paid to you after deducting the fees, interest, and other charges, if any. Given below is step-by-step breakdown of invoice discounting process:

  • You issue an invoice against the goods sold

  • The customer accepts the credit invoice

  • You send the invoices to the institution

  • The lender verifies your invoice 

  • The lender gives you financing as per the terms

  • You or the lender collects amount from the customer as per due date

  • The excess amount after deducting interest and charges is paid to you

What is Confidential Invoice Discounting?

Financial institutions may offer the confidential bill discounting provision. Under this agreement, the customer does not know that you have opted for the invoice discounting facility. 

Generally, one opts for this facility to ensure that they do not lose their customer’s confidence. However, the lending institution may charge an additional fee for offering this facility. You can clear these terms before opting for bill discounting and ensure that the option is viable for your business operations. 

You also need to keep in mind that under this option, you will have to keep track of your invoices and ensure they are paid on time.

Invoice Discounting vs Invoice Factoring

Factoring and discounting are two different concepts and understanding the difference is crucial to making an informed decision. The main point of difference between invoice factoring and bill discounting lies in who manages the credit invoices and is responsible for collecting them.

In invoice factoring, you sell your invoices to the lending institution. As such, the lending institution or the financing institution is responsible for managing collecting the credit invoices.

On the other hand, in bill or invoice discounting, you retain the control of your credit invoices. This means that you are responsible for managing and collecting payment from your customers. In short, you receive a loan against your invoices and do not sell them to the lending institution. 

Invoice Discounting Example

To better understand how the bill discounting facility works, here is an example:

You raise an invoice for ₹1 Lakh and take it to a financial institution for getting an advance against it. The lender will then assess your creditworthiness and the validity of the bill.

Post that, the lender will present the terms of invoice discounting. This will contain the maximum fraction of value you can avail as loan, the interest rate, and so. Once you agree to the terms, the lender will give financing as per the terms.

Suppose, if the lender agrees to finance 75% of your credit invoices, you will receive a maximum of ₹75,000 against your credit invoice of ₹1 Lakh. The remaining ₹25,000 will be paid when the customer pays the invoice. The lender will deduct interest amount and other charges from the ₹25,000 and pay the rest to you.

Documents Required for Invoice Discounting

Given below is a list of documents that you will need to submit to avail invoice discounting:

  • KYC documents

  • Income proof 

  • Vintage proof and address proof for business

  • Business plan

  • Bank statements

  • Registration certificate, license, 

  • Audited financials

Do remember that depending on the lender you choose, the documentation required may vary. You can check with the lender in advance to ensure that you have all the documents and can avail the financing without any hassles.

Invoice Discounting Advantages and Disadvantages

In order to make the best decisions for your finances and business operations, you need to consider the advantages and disadvantages of bill discounting. 

Given below is tabular overview of the same:

Advantages

Disadvantages

Access to instant cash

Higher interest rates and costs

Short – term credit option

May not available for everyone

Can avail higher amount as the business grows

Can avail the facility only on commercial invoices

Option to keep the financing confidential

Reduces the profit

Interest levied only on the funds utilised

Comparatively shorter repayment tenure

The invoice discounting facility or any other credit facility option is something you should choose only after careful consideration. Doing so will allow you to keep your finances and by extension your business operations, secure and running.

However, when availed and used responsibly, bill discounting is an option that can tremendously help grow your business. With your cash flow requirements met, you can ensure that your business runs smoothly at all times and at an affordable price.

FAQs on Invoice Discounting

Is invoice discounting legal?

Yes, bill discounting is a credit against your receivables and legal in India.

How is this program run for an enterprise?

Before agreeing to the invoice discounting facility, the invoice discounting company will assess the enterprise’s creditworthiness and the validity of the invoices presented. After that, the company will decide the percentage of cash receivables it will pay upfront and this can go up to 95% value of the invoice.

 

How is this program used by vendors?

Bill discounting facility is used to address working capital issues and to access financing in times of need. 

 

Is the program useful for my business?

If your business is facing a cash flow problem, then invoice discounting is a good option. Moreover, the facility is generally more beneficial for big companies with high profit as they have the capacity to absorb the costs and risks associated with it.

 

Is the bill discounting a funded credit facility?

Yes, since funded credit is when the borrower receives cash and not commitment of cash, this facility is a funded credit option.

 

Is my data secure on Clear Invoice discounting?

Yes, your data on Clear Invoice discounting is secure since the platform adheres to the best data security measures. 

 

How do you account for invoice discounting?

The accounting for invoice discounting is done on the cash and bank account of the drawee, depending on whether it was cash or bank discounting.

 

How long does it take for funds to be released in invoice discounting?

The period of availing financing against your invoices varies depending on the institution you choose. Some may offer financing instantly while some take a few days.

 

Who can avail Invoice Discounting?

Any business, large, medium or small, can avail the invoice discounting facility. 

 

How will you know if Invoice Discounting is good for you?

The main purpose of invoice discounting is to give you the financing you need to run operations smoothly. To determine whether this facility is the right option for you, you need to look at your cash flow and whether you need the cash up front.  

 

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