Bill Discounting vs Bill Negotiation: What Exporters Must Know

Even though bill discounting and bill negotiation serve more or less similar purposes, they are distinct from one another in several ways.

So, if you use them interchangeably – you may want to STOP right now!

To understand what we are hinting at, look at the differences between them from an exporter’s perspective.

Check out the section below to find more about it!

What Is Bill Discounting?

It is a useful trading activity that allows sellers to raise funds against unpaid invoices when they find themselves struggling with a liquidity crisis. In this process, an exporter approaches a bill discounting platform to trade bills at a discounted rate. This option is also popularly known as invoice discounting or accounts receivable discounting. 

In most cases, the terms of repayment and sanctioned bill amount depends on customers’ creditworthiness. Creditworthy bills can fetch you 80% to 90% of the invoice amount and help you meet various cash-related requirements seamlessly.

Usually, reputed fintech companies like KredX take 24 hours to 72 hours* to disburse cash against the invoices. With the help of availed funds, exporters can replenish their working capital and account for everyday expenses more efficiently. 

On maturity, the exporter is required to collect payment from customers. Following this, it extends the due balance plus the applicable finance cost to the invoice discounting platform.

The exporter does not lose his/her control over the company’s sales ledger through this process. Plus, he/she can keep this entire agreement confidential since the customer is kept out of this set-up until the end. 

What Is Bill Negotiation?

Typically, bill negotiation denotes that, after shipment, export documents are negotiated at a banking counter to draw out a facility. You must note that bills are negotiated for loads that are carried out under documentary credit.

Exporters need to be cautious when it comes to preparing papers under this documentary credit. They are required to ensure that the said bill is clean and does not contain any discrepancy. 

These pointers elucidate export bill negotiation in brief –

• The exporter prepares essential documents after the export-related formalities are completed. Such documents are sent to overseas buyers to receive cargo delivery, and they include – commercial invoice, bill of lading, bill of exchange, packing list, certificate of origin, quality certificate, etc.
• In case the shipment is made as per the terms of Letter of Credit, exporters must ensure to meet all specifications detailed by the same.
• Once shipment documents are ready, they are submitted to the exporter’s financial institution that serves as his/her authorised dealer bank.
• The financial institution verifies whether all the terms and conditions of the letter are met or not, and then proceeds to negotiate the bills of export. 
• The invoice amount is credited to the exporter’s account after bills are negotiated, and applicable charges are deducted. 
• Once the overseas buyer’s amount is realised, the financial institution takes the discounted amount back after deducting the applicable interest amount.

Note that, you can also negotiate the invoice if the same shipment was carried out as per DAP (DP) or DA terms. After the overseas buyer’s amount is realised, the financier debits the applicable interest amount and the discounted bill value. 

Through this above discussion, you may notice that bill discounting and bill negotiation are carried out differently and used in different conditions. However, the end purpose, i.e. to release capital tied in invoices, is the same.

Another noticeable point of difference is that unlike bill negotiation, the process of bill discounting is quite relaxed and is not necessarily carried out as per stringent agreements of any LC or DA/DP. 

Another difference is that clean bills are ideally negotiated and then credited to the exporter’s account only after it is accepted by the bank that issued the Letter of Credit in question. In the case of bill discounting, you can approach any platform to sell your accounts receivables for securing a cash advance. 

Also, bill negotiation is considered a relatively less risky trade product from financiers’ perspective than bill discounting. It is mostly because bill negotiation is backed by a Letter of Credit.

Bottom Line:

Both bills discounting and bill negotiation helps to release capital tied in invoices. However, the process involved and terms of usage vary significantly in both cases. This is why, even if some may use the terms interchangeably, they are quite distinct. Exporters ought to be smart about which option to avail at what time to meet liquidity crises more efficiently.