Invoice Discounting vs. Bill Discounting: Know the Difference

Invoice Discounting vs. Bill Discounting: Know the Difference

When businesses are having cash flow problems, they often turn to financial solutions like invoice and bill discounting. These methods provide quick access to funds stored in unpaid bills. But how do businesses pick the one that best suits their requirements? Understanding the difference between these two can help them make an informed choice. This blog post will help businesses to gain clarity about these two solutions.

Bill Discounting

Bill discounting is a financial transaction where a business, holding bills receivable (formal written promises of payment from customers on a future date), sells these bills to a bank or financial institution before their maturity date to receive immediate cash. The financial institution provides an advance against the bill's value but at a discounted rate. This discount represents the interest and service charges for the period until the bill's maturity. On the maturity date, the financial institution then collects the full amount from the customer who originally issued the bill receivable. In essence, it allows businesses to convert their future receivables into immediate working capital.

Businesses like micro, small & medium enterprises (MSMEs) that need rapid cash without affecting their balance sheet might benefit from bill discounting. Since it is an off-balance-sheet solution, the company's liabilities are not increased.

Invoice Discounting

As they sound quite similar and their ability to address the same issue, bill discounting and invoice discounting are often confused, although they are two rather different procedures. The main reason for this is that invoice discounting employs past-due invoices as loan collateral.

After invoice discounting, the company will receive a loan that is less than the amount of the outstanding invoices (usually 80% or any invoices that are less than 90 days old). Typically, the company financing the loan distributes loans based on the total percentage of invoices owed in order to spread out their liability, so even if all the invoices aren't paid, the company taking out the loan can still pay back their debt. Since the company can pay them back as soon as the invoice is paid, these loans are relatively short-term.

Generally speaking, businesses with large profit margins that can support the interest payments related to invoice discounting are better suited for this strategy.

While talking about invoice discounting, it is important to know about invoice factoring. This reason behind it is that both of them give companies access to money held in their outstanding invoices. But still both of the are different. By borrowing against their invoices, invoice discounting allows businesses to keep control over your client relationships and collections. It's more akin to a financing solution. Most of the time, their customers are not aware of the arrangement. Whereas, invoice factoring is more of an outsourcing solution where businesses sell their invoices to a third party who then manages the collection process directly with their customers.  

By understanding the definition of these two, businesses are now clear about them and can make informed decision. Below points will give more insight on them and help businesses more in their decision-making process:

·       Framework: Using invoices as security, invoice discounting is set up like a loan. Bill discounting, on the other hand, is selling invoices at a discount in order to get money right away.

·       Impact on the balance sheet: As invoice discounting entails borrowing and increases obligations, it has an impact on the balance sheet. However, because bill discounting is an off-balance-sheet activity, it can help keep a clean financial statement.

·       Cost: Businesses pay interest and maybe other fees when they use invoice financing. By reducing the invoice value, bill discounting might result in a loss of money but also save interest expenses.

After learning about these two options, it is clear that for MSMEs bill discounting can be great option.

The Trade Receivables Discounting System (TReDS) platform should be brought up whenever bill discounting is discussed. TReDS is a cutting-edge online platform that enables MSMEs to quickly and easily obtain financing against their trade receivables. MSMEs can sell their invoices to banks and corporations in India at a discounted rate through TReDS systems like M1xchange TReDS.

In accordance with the Payment and Settlement System (PSS) Act of 2007 and with RBI approval, Mynd Solutions Pvt. Ltd. launched the TReDS platform "M1xchange" on April 7, 2017. The purpose of this website is to simplify and streamline the process of discounting bills of exchange. By converting trade receivables into liquid cash without recourse, it has helped MSMEs obtain quick cash. It has prompted private, nationalised, and foreign banks to use a special bidding process to finance these receivables at the best rates.

Conclusion

In this blog post businesses have learned about bill and invoice discounting. For MSMEs, bill discounting can be a great option.

Since its launch, MSMEs have been able to obtain quick financing using the M1xchange TReDS platform, which turns their unpaid invoices into cash. This is accomplished through a special bidding procedure that includes a range of banks, including foreign, nationalised, and private ones. The financing rates are fair, and the procedure runs well.