What Is The Difference Between Bill Discounting And Bill Purchase?

Bill discounting and bill purchasing are two financial solutions that many businesses use to get money in the shortest time possible. Organisations that are keen on maintaining efficient cash flow consider these instruments quite useful. The better a business knows the differences between bill discounting and bill purchasing, the better off it will be, in making educated judgments concerning the financing options that will most probably be available to it.

What is Bill Discounting

Bill discounting is a financial process involving the sale of a firm’s bills or invoices by the business to a financial institution at a discount. Meaning, the business receives cash immediately from the institution whereas the institution collects the full amount from the buyer of the goods or services later on.

Here’s how bill discounting works:

• Issuing a Bill: A bill or invoice is issued by a business to a buyer in exchange for the delivery of products or services.
• Discount Application: The business then sells this bill to a financial institution at a discount. For example, if the bill is worth ₹100,000, the institution might purchase it for ₹95,000.
• Immediate Cash Flow: The business receives ₹95,000 immediately, allowing it to address its cash flow needs.
• Collection: The financial institution collects the full ₹100,000 from the buyer on the due date.

Key Points About Bill Discounting

• Quick Cash Flow: Businesses get access to cash sooner, which can help with immediate expenses.
• Discounted Rate: The amount received is less than the bill’s face value due to the discount applied.
• Short-term Financing: It is typically used for short-term cash flow needs.

What is Bill Purchase

Bill purchase is quite similar to bill discounting, in the sense that it relates to the outright buying of bills or invoices from a business, with the financial institution buying the invoice from the business at a price lesser than the face value of the invoice. The only difference happens to be the nature of sale; that is, the more direct sale nature of bill purchase, while bill discounting happens to be viewed as short-term loan.

• Issuing a Bill: In the event of a transaction, the organisation generates an invoice for its client.
• Selling the Bill: The business sells this invoice to a financial institution at a discounted rate, rather than waiting for payment. 
• Immediate Payment: The institution provides the business with a payment upfront, which is less than the invoice amount.
• Repayment Collection: The institution then collects the full amount from the customer when the invoice is due.

Key Points About Bill Purchase

• Immediate Cash Availability: Businesses get immediate cash in exchange for their invoices.
• Direct Sale: The business sells the invoice directly to the institution, which then collects payment.
• Discounted Amount: The business receives less than the invoice’s face value due to the discount.

Bill Discounting vs Bill Purchase: Key Differences

While bill discounting and bill purchase share similarities, they have distinct differences. 

• Nature of Transaction: Bill discounting is often seen as a short-term loan where the invoice acts as collateral. Bill purchase is more of a direct sale of the invoice.
• Purpose: Both methods aim to improve cash flow, but bill discounting may involve a more formal agreement and interest rate, whereas bill purchase is straightforward and immediate.
• Cash Flow: Both provide immediate cash, but the terms and conditions can differ. Bill purchase may offer a quicker resolution since it’s a direct sale rather than a loan.

When to Use Bill Discounting or Bill Purchase

Businesses often choose between bill discounting and bill purchase based on their specific needs:

• Use Bill Discounting:
  • When a business needs quick cash flow.
  • For businesses that favour a more formal relationship with their financial institutions
  • For short-term financial gaps where the invoice is used as collateral.

• Use Bill Purchase:
  • When a business wants a straightforward sale of invoices.
  • If immediate cash is needed without involving loan agreements.
  • For simpler transactions where the focus is on quick payment.

How Invoice Factoring Fits In

Another financial solution similar to bill discounting and bill purchase is invoice factoring. Invoice factoring entails the sale of invoices to a third-party factor, which subsequently collects payment from the consumer. The factor gives the business almost instant cash, which is 80-90% of the invoice amount, and collects the payment in full from the buyer. It remits the balance, minus charges, to the business once the invoice is paid.

Benefits of Invoice Factoring

• Improved Cash Flow: Businesses receive immediate cash, which can be crucial for operations.
• Outsourced Collections: The factor manages collections, saving time and effort for the business.
• Flexible Terms: Factoring can be tailored to suit different business needs.

Final Thoughts

Bill discounting provides means through which organisations can enhance cash flows; similarly, bill purchase presents a form of short-term loan utilising the invoice as collateral and sale of the invoice directly for instant cash. Invoice factoring also encompasses outsourced collections.

All of these methods have their own merits, and the choice is subjective based on specific needs and circumstances of a business. To know the way these financing options can be maximised through their usage, you may want to look into KredX’s solutions. KredX is one of the leading suppliers for supply chain financing solution providers in India, dedicated to supporting businesses to accelerate finance using innovative technology. Visit KredX’s website to learn more about how we can assist your financial needs.