What is A Bill Discounting Platform & How Does It Work?

A bill discounting platform is a marketplace that provides businesses the opportunity to get instant cash by selling their outstanding invoices or bills to a third party registered on the Platform in exchange for a discounted amount.

The third-party can be Bank/FIs, NBFC, HNIs, Firms, and individuals, who pay the business a portion of the invoice value upfront and takes back his investment in the Invoices discounted along with charges as and when these are realized from the customer later.

On the Bill Discounting Platforms, investors/ lenders get an opportunity to invest in invoices raised on the Blue chip Companies and earn above-market returns (in the range of 11% to 13.5% per annum) by discounting the invoices available on the platform.

On the other hand borrowers/SMEs gets an opportunity to get working capital finance to meet day-to-day operational fund requirement. Fintech companies also leverage technology to remove layers between the savers and users of funds resulting in Return and cost optimization of funds.

Bill discounting in India is a valuable tool for businesses that need access to cash quickly or have difficulty collecting payments from their customers.

By selling their invoices, companies can access working capital that can be utilized to meet their immediate financial deficits and focus on their core operations. It enables them to continue their operations smoothly without any financial glitches.

In a bill discounting arrangement, the Investor/ lender agrees to advance funds to the MSME/ borrower based on the value of the bill of exchange. The borrower is then responsible for repaying the loan, plus interest when the bill of sale becomes due.

How Does Bill Discounting System Work?

Bill discounting in India is a form of financial arrangement in which an Investor/ lender provides funds to a borrower in exchange for a promissory note.

It is also popularly known as a bill of exchange. The borrower is typically a business or individual who has issued the bill of exchange to a customer or supplier to facilitate a trade or sale.

There are several steps involved in the bill discounting process:

1. The bill discounting platform assesses the borrower’s creditworthiness and the customer or supplier named on the bill of exchange. This may involve reviewing financial statements, credit ratings, and other relevant information regarding both the involved parties.
2. If the Investor/lender determines that the borrower and customer or supplier are creditworthy, they may agree to advance funds to the borrower based on the value of the bill of exchange. The lender may also set specific terms and conditions for the loan, such as the interest rate and repayment schedule.
3. The MSME/ borrower presents the bill of exchange to the companies or financial institutes that provide bill discounting in India. The borrower will also need supporting documentation, such as invoices or proof of delivery, to proceed with the application.
4. The MSME/ borrower receives instant credit from the lender and uses them to meet financial obligations or invest in their business.
5. When the bill of exchange is due, the borrowing party is responsible for repaying the due amount and interest to the lender or institute providing bill discounting in India. This is typically done by presenting the lender with the bill of exchange and other required documentation.

Bill discounting in India serves as a valuable financial tool for businesses and individuals who need to access funds quickly and efficiently. It enables the business to streamline cash flow and maintain a healthy alternative to the financial crisis.

Unlike personal or business loans, bill discounting in India is a reliable and faster way to fulfill financial dues. However, it is essential to carefully consider the terms and conditions of the loan/ facility before entering into this type of arrangement.

Bottom Line

However, it is essential to note that bill discounting is a form of short-term Investment/ lending and can carry some risk.

The business must be confident that the customer will pay the invoice in full and on time, as the Platform (acting on behalf of Bank/FIs, NBFC, HNIs, Firms, and individuals) will be collecting payment from the customer on behalf of the business. If the beneficiary does not pay the invoice per the time commitments, then the industry may be required to pay back the discounted amount to the financial institution or bill discounting company.