Has it ever happened that you thought of getting a loan and then getting a discount on the final bill? Let’s be honest for a minute that this is what came to your mind when you first heard of bill discounting. However, that understanding and assumption can be risky in the market out there, and that is why Indifi has brought this detailed guide on bill discounting. Apart from learning the ABC’s of the context, you’ll also get to know why bill discount is getting popular as a form of loan and why is it a major trade activity these days. So, invest in roughly two minutes of your busy schedule with Indifi and get to know all about online bill discounting.
What is Bill discounting?
Going by the financial terms of the market, there are two principal parties involved in a transaction of a bill discount. There is a seller and a buyer and both of them meet the requirement of their capital with the help of a third party. This third party was not a part of the initial transaction between the seller and the buyer and hence is not considered as the principal party.
Moving on to the description of bill discounting, it is a method of trading the bill for the exchange of services offered by one party to the other. It is to be paid before the maturity period ends. This period of maturity was initially decided by the principal parties while getting into a transaction involving monetary benefits.
Now if the seller gets his bill payment after the involvement of the third party like a bank, the seller entity agrees to bill discounting. The bank pays the seller the amount which the buyer owes him or her at a price smaller than its par value. This amount which the bank paid to the seller on behalf of the buyer is a kind of a loan accepted by the consumer. However, for this to happen, it is the responsibility of the seller to inform the buyer that he or she is now liable to pay the bill to the bank at the end of the maturity period.
And later, the bank is repaid with the full amount from the buyer. The difference which the bank earns from what it paid to the seller and what it later received from the buyer is called the bill discount.
Given this revenue-earning technique and meeting the urgent requirement by means of an advance loan, this mode of transacting is gaining popularity among the corporates and creditors like banks.
Understanding bill discounting with an example
Consider a situation in which two parties, A and B, are involved. A being a wedding planner and B being a customer of their services. Now, these two agree that the payment of INR 1 lac for the services provided by A will be paid by B after a period of 3 months from the date of delivery. So, if the services were completely delivered on 10th Oct 2019, B will have to make a payment on 10th Jan 2020.
However, A being a known company gets another order from a company C on 20th Oct 2019. Though they are required to make some new purchases for the new demand but unfortunately, they are short on funds. Also, as bound by contract A cannot go to B for any payments to be made before the maturity period of 3 months ends. So, in such a situation, A goes to a bank to sell the bill for a loan.
The bank agrees on purchasing the bill at INR 90,000 after taking into account the associated risk and interest factors. Now, A is liable to go to B and inform him that when the maturity period is going to end, the bill amount of 1 lac is to be paid to the bank. Once, B confirms it, the bank transfers the amount of INR 90,000 into A’s account.
And on 10th Jan 2020, the full amount of 1 lac is paid to the bank by B. This difference of INR 10,000 becomes the revenue of the bank and this process is called bill discounting.
Bill discount as a major trade activity
Now that the major earning aspect of bill discount is understood, it is easier to accept the fact why this kind of loan process is gaining so much popularity.
Apart from understanding the way it works among the different parties, it is also important to understand why the method of bill discounting is reliable as well.
The process of bill discounting is popular as a trading activity because:
- Ease of access to the seller and the buyer as well.
- The certainty of payment to the seller and the bank too.
- Smooth liquidity.
- Profitable to bank and margin is saved by the seller as well.
- Funds’ safety is ensured.
- Stability of prices to all parties involved.
- Safe investment and returns.
Now for a method of loan advancement, that is safe to such a great extent, has all the risk factors calculated is emerging as a good choice among the investors. Additionally, it is liable to be paid on completion of the maturity period makes it the major trade activity in the market.
Points to note for bill discounting
So far, it has been established that bill discount happens when an exchange of services is made between two parties, which makes the bill the key of the entire loan process. For a bank to accept a bill and agree to the condition of advance loan payment or bill discount, there are a few conditions to be met by the seller.
The conditions are:
- Type of bill: Out of the kinds of bills available, banks prefer the usance bill. A usance bill allows the buyer to pay for the services he/she bought in a period of days or months. Trade bills, accommodation bills, inland bills, and foreign bills are some of the bills which the banks approve for bill discounting.
- The bill has the consent of the two parties and it is considered valid only if it bears a minimum of two signatures, one from each party. Also, it should clearly state the final amount to be billed.
- At the time of paying the bank, the bill of exchange is to be submitted and accepted on the due date of maturity.
Although, there are minor margins that the banks make on such advance loans but given the huge scale of transactions involving bill discounting, all the major banks and creditors are in favor of it. And all in all, every party involved with bill discounting is at ease and satisfaction, which is the topmost reason for its popularity.
However, if you feel that you need more clarity on the aspects of bill discounting then feel free to connect with Indifi at any point and get all your doubts cleared. We understand you've earned every penny with hard work and hence, we strive to make investments safe for you.
|