Bill Discounting: A Comprehensive Overview

 Bill Discounting: A Comprehensive Overview

We are all annoyed when our payments are postponed or halted. Now consider what MSMEs would do if they found themselves in a predicament where their payments were delayed or halted. Bill discounting is one strategy that they can employ to address these issues.

In this guide, you will be provided detailed information on this discounting:

What is the term "billing discounting?"
Through the process of this discounting, a business can raise money for its urgent financial requirements by selling its accounts receivable, bills receivable, or trade receivable to a financial institution. In order to grant an advance against those debts, the financial institution can verify the legitimacy of the accounts receivable and the creditworthiness of the business.

Who are the Participants in Bill Discounting?
This discounting procedure involves three parties:

·       Drawer

A drawer is a seller or business that offers products or services to customers with the expectation of payment later. The bill of exchange is created by a drawer.

·       Drawee

A drawee is a buyer of products and services who will be responsible for future payments. A debtor of the drawer against whom the bill of exchange is drawn is hence referred to as a drawee.

·       Payee

A payee is an organisation that needs to receive the money. The bank or NBFC becomes the payee when the drawer discounts the bill with them.

Characteristics of Bill Discounting
The following characteristics of the discounting procedure set it apart:

·       Short-term Finance

With a maturity time varying from 30 to 120 days, bill discounting is a short-term financing method. As soon as the customer of the company that discounts a bill pays, the financier is paid back.

·       Discounting Charges

The financier often applies discounting charges to the bills that are lowered in order to make a profit or commission. It is the discrepancy between the discounted face value of the bill and the credit applied to it.

·       Credit Rating Is Important

In general, financial institutions do not discount the invoices of non-credit-rated firms. Better discounting conditions and quicker sanctions are therefore dependent on an organisation's credit rating.

·       Escrow Account for Payment

Typically, an escrow account is set up for both the repayment and the credit disbursement. This is carried out following the financer's assessment of the bills' authenticity and the acquisition of a NOC from the company's client, or bill drawee.

The Bill Discounting System works like this:

·       First, a business and its client engage in a transaction. Sometimes the customer may only pay a portion of the total amount due or when the order is delivered. In this situation, the business would draft a bill of exchange for the client to pay later.

·       The business can decide to discount this bill with a bank or NBFC if it needs money. To reduce the charge in that scenario, it would ask the customer for a NOC (No-Objection Certificate).

·       After that, the bank or NBFC would verify the bill's legitimacy and look up the company's credit score. Lenders often do not discount the invoices of unrated businesses.

·       The financial institution would form an escrow account and provide an advance of up to 90% of the bill's face value if it determined that the business was creditworthy. The financial institution's commission, also known as the discounting charges, is the difference between the bill's face value and the advance that was granted.

·       The corporation, which is the bill drawer, reimburses the financial institution (FI) for the full amount after receiving payment from its client. If the client doesn't pay, the drawer is still responsible for repaying the financial institution; if they don't, the FI will charge interest for the late payment.

So, here is the essential information you need to know about bill discounting.

There is a known platform called M1xchange that looks after this process of discounting.

On April 7, 2017, Mynd Solutions Pvt. Ltd. launched the TReDS platform "M1xchange" in accordance with the Payment and Settlement System (PSS) Act 2007 following RBI permission. It accomplishes this in order to enable MSMEs to get discounted bills of exchange and invoices across the whole country of India.

By turning their trade receivables into liquid cash on a non-recourse basis, it assists MSMEs in securing finances. The exchange has encouraged international, private, and nationalised banks to finance these receivables at the most competitive rates through a unique bidding procedure.

Through an open bid procedure including several lenders, it seeks to offer MSMEs cash flow financing tied to supply chains at reasonable rates.

Conclusion

Any firm can become frustrated by late payments. However, what happens if MSMEs go through it? Bill discounting can be a successful tactic for them. You have got comprehensive information on this discounting in this guide.

By converting trade receivables into liquid cash on a non-recourse basis, M1xchange is the TReDS platform to assist MSMEs in securing finances.