What Is Bill Discounting and How Does It Work

In the competitive atmosphere of modern business, every company faces one or another challenge to maintaining a steady cash flow. This happens more in SMEs, which have to bridge the gap between raising an invoice and receiving the payment against that invoice from their customers. One of the most effective financial solutions to help companies overcome the challenge of cash flow is bill discounting. This is the way to convert any unpaid invoices of a business into instant cash to maintain a smooth cash flow and meet the working capital needs of the business. Through this blog, we will have a detailed discussion of what bill discounting really is, how it works, and why it is an ideal solution for the liquidity-minded business. We shall also briefly touch on how invoice discounting features within this financing strategy.

Understand Bill Discounting

Bill discounting is a financing method through which a business sells its outstanding account receivables (unpaid invoices) to a financial institution or third-party financier at a discounted price. In return, the business receives cash immediately, rather than awaiting the due date of the payment by the customer. In other words, bill discounting is about unlocking the money entangled in unpaid invoices so that the running of a business happens seamlessly.

For example, a company that has raised an invoice of ₹10,00,000 payable in 90 days. Instead of waiting for 90 days, the business will approach a financial institution to get an advance payment. The financier finances it after discounting his interest in the invoice, normally ranging from 1% to 3% of the value of the invoice, and later collects the payment from the customer of the business when the invoice is due.

How Does Bill Discounting Work?

The process of bill discounting is pretty simple. Here is how it works in detail:

Raising an Invoice: The business raises an invoice against the goods or services provided to its customer with a specified payment term (e.g., 30, 60, or 90 days).

Approaching a Financier: The business approaches a financial institution, bank, or a digital platform such as KredX, instead of waiting for its payment, for bill discounting. The financier reviews the invoice and evaluates the creditworthiness of the customer.

Invoice Discounting: After approval, the financier allows the business to advance a certain percentage of the invoice value, usually 80% to 90%, after deducting a discounting fee from the invoice value that the business has submitted for discounting. The rest is kept as a reserve and paid back to the business once the customer makes a payment against the invoice.

Customer Pays Financier: On the due date, the customer pays the invoice amount directly to the financier. Once the payment is received, the financier releases the reserve amount to the business minus any additional charges.

Transaction Closure: The transaction is now closed, and the business is free to use these funds for immediate financial needs—either for supplier payments, operational costs, or expansion.

Bill Discounting Types

There are mainly two types of bill discounting:

Without Recourse: In this type, the risk of non-payment falls on the financier. If the customer fails to pay the invoice, the business has no liability. Such type of discounting is rarely issued and has higher discounting rates.

With Recourse: In this case, the business is liable if the customer doesn’t pay on the due date. The financier can recover the funds from the business in case the customer defaults. This type of discounting is more common and has lower discounting rates.

Benefits of Bill Discounting

Bill discounting offers several benefits which make this a popular choice among businesses:

Improved cash flow is thus the major advantage as it enables the businesses to run their day-to-day operations smoothly, without having to wait for either 30, 60, or 90 days to come in for money.

No Collateral Required: Invoice discounting does not require any collateral, unlike traditional loans. The invoice itself acts as the security for the transaction.

Flexibility in operation: They may choose which bills to be discounted, especially considering the immediate money requirement that they may have. This way, they maintain greater control over their finances.

Quick Access to Funds: The process involved in Invoice discounting is quite fast, more so when it is done through digital channels like KredX. Businesses may get funds back in a question of days, if not hours.

Low-Cost Financing- The cost of discounting bills, compared to other available alternatives of financing, is much low; hence, whatever the business, the cost remains a low-cost solution.

Invoice Discounting vs. Bill Discounting

While the two terminologies are used interchangeably, invoice discounting and bill discounting are two very dissimilar financial solutions. Both these schemes are similar in the one aspect that payments are made at the instance of selling invoices, but the difference lies in the control of the receivables.

In invoice discounting, the business retains control of the collection process and the customer relationship. The financier will take an advance against the invoice without the customer being aware of the financing arrangement. The business still has to collect and repay this amount back to the financier.

On the other hand, in Invoice discounting, the control of the receivables is transferred to the financier. The financier makes collection; hence, the customer is given the knowledge that the invoice has been discounted. Invoice discounting in most cases is common among the big businesses, and Invoice discounting in most cases is common among the SMEs.

When Should Businesses Consider Bill Discounting?

It is an ideal solution for companies that often incur cash flow problems resulting from delayed payments. The situations under which bill discounting can prove beneficial are given below:

Seasonal Demand: Businesses experiencing seasonal demand may resort to bill discounting in order to manage their working capital during periods of sluggish sales.

Growth: Any company growing rapidly needs an increasing amount of funds to support its expansion. Bill discounting proves to be a quick way to access funds without increasing the level of debt.

Long Payment Cycles: Any business dealing with customers who have extended credit periods, say 90 days, can resort to Invoice discounting to prevent the breakup of cash flow.

Supplier Payments: Bill discounting enables businesses to pay suppliers on time to avail of early payment discounts or just to keep good relations with the suppliers.

How KredX Can Help

KredX is a premier, though relatively new, online platform providing discounting services on bills, especially for businesses. It assists businesses in the discounting of their invoices hassle-free via an online seamless process. KredX has become the most favoured platform among SMEs across India because of the real-time competitive rate quotes, quick approvals, and overall hassle-free experiences it provides.

In short, bill discounting is a powerful financial tool, allowing enterprises to access the money that is locked up in unpaid invoices. It makes one’s money available at the most opportune time in order to maintain liquidity, work on one’s working capital, and just focus on growth. Whether it is for a short-term financing solution for small businesses or a growing company that wants to work on its capital, bill discounting can be effective in reaching your financial goal.

Are you considering bill discounting for your business? Get complete solutions at KredX. Get in touch with our experts and understand how to do more with your cash flow. Take your business to the next level. Let delayed payments not tie you down—empower your business with bill discounting from KredX and stay ahead of the competition.