The Pros and Cons of Bill Discounting in India: Is it the Right Financing Option for Your Business

Bill discounting in India has increased to a great extent owing to its numerous opportunities. And so, if you’re thinking about getting it done correctly, you first need to know what bill discounting is all about and how it works.

To help you understand the same and decide the right financing option for your business, we are sharing our insights on bill discounting. Starting from what it means to how it functions, and its pros and cons, everything is discussed below.

So, just scroll down and choose the right option that aligns with your specific business needs and goals.

Bill Discounting Explained

A very popular business process is bill discounting, which refers to getting a discounted price payment from a financial institution such as a bank against a pending bill from a third-party partner. The financial institute is the lender here, which needs the unpaid invoice to assess the loan value.

The loan value of bill discounting is usually slightly lower than the invoice amount. The subtraction of the loan value from the invoice amount works as the lender’s credit.

How Bill Discounting Works

Suppose you are selling your company products to a client, who is asking for 3 months to pay the entire bill. If you approach a bank for a loan against the invoice (still unpaid by your client) as collateral, the bank will offer you a discounted rate, which the bank will keep as its commission.

You will get the rest as a loan immediately (excluding the commission) and after 3 months, the bank will receive the full payment from you as your client pays. This is how bill discounting works.

Pros of Bill Discounting

Here are the pros of bill discounting, which make this method the ultimate funding solution for sellers across India.

1. The first and biggest benefit of bill discounting is immediate funding, which is really important for businesses. This is the reason why bill discounting in India is so popular, especially among start-up businesses. With bill discounting, the sellers get an opportunity to receive funds, which helps them to keep going with sufficient liquidity.
2. For businesses, working capital needs are always there. If you look at bill discounting, you’ll see that it’s one of the easiest ways of getting short-term loans from banks and other financial institutes. The workflow of businesses can run smoothly for this reason.
3. There is more availability of bill discounting lenders these days. Hence, you can get reduced bank fees and margins for your loans. But, if your lender assumes any bad debt risk, the loan amount may be slightly get reduced.
4. The amount of bill discounting loans is decided by the banks on the basis of the amount utilized. Hence, you can take up small or large-scale loans depending on your needs. There isn’t any specific predecided amount by the banks.
5. For sellers across India, bill discounting has become a hassle-free way of fund management. That’s mostly because they find the fund disbursal process quite prompt and easy.
6. In this method, the bank fees or interests are decided by the banks on the basis of the amount utilized. Hence, these are more cost effective than traditional loans.

Cons of Bill Discounting

• Though there are many advantages of bill discounting, there are disadvantages too. Below are some of its downsides that you need to consider before opting for this method.
• Bad debts are not uncommon in bill discounting, which is definitely a risk of this method. If the buyer fails to pay the bill, the entire process is going to be difficult and you will still need to pay the bank.
• Illegitimacy of transactions may also happen in bill discounting. For this reason, banks remain very alert while assessing loans based on authentic invoices.
• Bill discounting is more expensive than bank overdraft and some other types of financing methods. So, before you opt for this method, you need to know about others too.

From the above pros and cons of bill discounting, you’ll surely be able to decide whether it’s appropriate for you or not.

To know more, reach us today at Finworks360. We provide excellent services of bill discounting in India with our dedicated team of professionals and experts.