Also known as a discounting of bill, a bill discounting is a process that involves effectively selling a bill to a bank or similar entity

for an amount that is slightly less than the par value and before the maturity date associated with the bill of exchange. The debtor tenders payment to the new owner of the discounted bill in the full amount agreed upon originally. This approach allows the issuer of the bill to receive cash before the actual due date associated with the bill, while also allowing the buyer to make a modest profit on the cash advance extended to the bills originator. Suggest Edits One of the easiest ways to understand how bill discounting works is to consider a bill of exchange issued by ABC Company to its client, XYZ Company. ABC Company decides to cash in the outstanding bill in order to make use of the revenue now rather than later. To this end ABC approaches a bank with an offer to sell the bill for 90% of the par value. The bank looks over the transaction and decides the deal is viable. Upon approval, ABC receives 90% of the par value of the bill and instructs XYZ Company to remit payment to the bank. Once the bank receives full payment from XYZ, the deal is considered complete. There are several factors that a financial institution will consider before choosing to enter into a bill discounting transaction. One has to do with the degree of risk involved with making the purchase. This will usually mean evaluating the debtor involved to determine what degree of risk exists that he or she will either settle the bill late or even default on the debt altogether. The amount of time that remains until the bill comes due is also a consideration, with institutions favoring a shorter duration between buying the instrument and receiving payment in full. Assuming the financial institution determines that the degree of risk involved is within an acceptable range, the transaction can be completed and the originator of the bill of exchange compensated with an agreed-upon percentage of the total par value of the bill. Part of the bill discounting procedure will involve the creation of a contractual arrangement between the seller and the buyer of the commercial bill. Typically, the terms of the contract identify the percentage to be paid to the seller, and also include provisions that protect the buyer in the event that the bill is not paid according to terms. This may include the imposition of late fees or other charges, or even ultimately holding the seller liable for full payment of the bill discounting obligation if the debtor should default on the outstanding balance.

Bill Discounting : Overview Bill Discounting is a process where the financial institution gets the Bill of Exchange (Cheque / PO /DD etc.) before its maturity date and below its par value. Hence the amount or cash realized may vary depending upon the number of days until maturity and the risk involved. Discounting the bill of exchange is practiced to get the same immediately encashed before the maturity date. The liability in case of dishonor of the bill remains with the person in whose favor the bill is generated. A commercial bill discount is an act by which the legal holder of a commercial bill (including banker's acceptance draft and commercial acceptance draft) transfers it to bank to acquire cash before its maturity date. Bill Discounting : Process The following are the sequence of steps taken by the banks on receipt of completed application forms. 1. Application form is accepted and acknowledged. 2. Personal interview /discussions is held with the customers by the banks officials. 3. Bank's Field Investigation team visits the business place/work place of the applicant. (All the documents submitted are verified by the bank with the originals so as to ensure the authenticity of the same.) 4. Bank verifies the track record of the applicant with the common information sharing bureau (CIBIL). 5. In case of fresh projects the bank analyses the back ground of the applicant/firm/company and the Technical feasibility/financial viability of the project based on various parameters and also the existing market conditions. 6. Depending on the size of the project the file is put up for sanction to the appropriate level of authority. SANCTION AND DISBURSEMENT : 1. On approval/sanction, the sanction letter, is issued specifying the terms and conditions for the disbursement of the loan. The acceptance to the terms of sanction is taken From the Applicant.

2. The processing charges as specified by the bank have to be paid to proceed further with the disbursement procedure. 3. The documentation procedure takes place viz.Legal opinion of various property documents and also the valuation reports.(Original Documents to title of the immovable assets are to be submitted) 4. All the necessary documents as specified by the legal dept., according to the terms of sanction of the loan of the bank are executed. Disbursement of the loan takes place after the Legal Dept. Certifies the Correctness of execution documents. Bill Discounting : Documents The borrower and/or the guarantors have to provide the following documents to the banks or the lending institutions while submitting Bill Discounting Application. Certain documents may be demanded by the bank or the lending institutions in post sanction phase or on periodical basis

Address Proof : Latest Electricity/Telephone Bill or Receipt of Maintenance Charges or Valid Passport or Voters Identity Card or Purchase/Lease Deed/ Leave & License Agreement of Residence or Office Premises. Identity Proof : Valid Passport, PAN Card, Voters Card, Any other photo identification issued by Government Agencies. Business Proof : VAT/CST Registration No. or MIDC Agreement or SSI Permanent Registration Certificate or Warehouse Receipts or Shop & Establishment Act Certificate or Copy of Lease Agreement along with the latest Rent paid Receipt. Business Profile on Companys Letterhead. Partnership deed in case of partnership firms. Certificate of incorporation, Date of Commencement of Business and Memorandum of Title Deeds, Form 32 in for Addition or Deletion of Directors in case of companies.

Last three years Trading, Profit & Loss A/c. and Balance Sheets (duly signed by a Chartered Accountant wherever applicable)

Last one years Bank statement of the Firm. If existing loan, then sanctioning letter and repayment schedule of the same. Firm/Companys PAN Cards.

Individual Income Tax Returns of the Individual/Partners/Directors for last three years. Last one years Bank statement of Individuals, Partners, Directors. SEBI formalities in case of listed companies. Share Holding pattern of Directors duly certified by a Chartered Accountant. List of the Existing Directors of the company from the Registrar of the Companies. Written & approved confirmation of having No Legal Suit filed against any of the directors. If any such legal suit or proceedings are pending then the details of such legal suit or proceeding.

Bill Discounting While discounting a bill, the Bank buys the bill (i.e. Bill of Exchange or Promissory Note) before it is due and credits the value of the bill after a discount charge to the customer's account. The transaction is practically an advance against the security of the bill and the discount represents the interest on the advance from the date of purchase of the bill until it is due for payment.

Under certain circumstances, the Bank may discount a bill of exchange instead of negotiating them. The amount the Bank advances to you also depends on your past record and reputation of the drawee. Usually, the Bank may want some conditions to be fulfilled to be able to discount a bill:

A bill must be a usance bill It must have been accepted and bear at least two good signatures (e.g. of reputable individuals, companies or banks etc.) The Bank will normally only discount trade bills Where a usance bill is drawn at a fixed period after sight, the bill must be accepted to establish the maturity

The advising or confirming bank will hide the reimbursement instruction from the beneficiary so that his bank must present the documents to the nominated bank for negotiation in order to obtain payment under the DC terms.

Bills which are financed by the receiving branch, whether drawn under a DC or not, are treated as Bills Receivable by both the remitting branch and the receiving branches. Presenting a bill Bills may be presented to the nominated bank in two ways: 1. With recourse We check the documents and confirm that they comply with the DC terms, and send the bill with the original DC to the nominated bank requesting payment. The nominated bank need not recheck the documents and it can claim a refund from us in the case of an unspotted discrepancy. We pay our customer after receipt of funds from the nominated bank. 2. Without recourse We pass the original DC and unchecked documents to the nominated bank on a collection basis, requesting payment. The nominated bank has to check the documents in the normal way. Usually, we present documents to the nominated bank without recourse: a. When the opening bank is a member of the Bank nominated for payment, acceptance or negotiation b. When the nominated bank has confirmed the DC c. When the nominated bank is the drawee If you have a good standing, we can give you an advance against an OBN bill. You will then have to repay the advance from the proceeds of the bill. Finance Against Collection You as an exporter may ask the Bank for finance against a collection bill. Now, if your buyer will close the sale only if he gets credit, you may involve the Bank to arrange for the same. This will allow you to be flexible in the payment terms.

The remitting bank may finance a good creditworthy exporter by purchasing or discounting his collection bills under an "Export Line". However,

If the importer refuses a bill the Bank has purchased, the Bank must be sure of being able to get a refund. The importer must be reliable. The Bank usually tries to avoid the risk of refusal by keeping in touch with large banks. The Bank always ensures that when a bill is purchased, it is drawn on approved drawees within limits.

Though both factoring and bill discounting provides short term finance, however in bill discounting the drawer undertakes the responsibility of collecting the bills and pay the proceeds while in factoring it is the factor that usually undertakes the responsibility of collecting the bills. Given below are some more differences between the two 1. Bill discounting is always of recourse type while factoring can be either with or without recourse. In case of recourse the factor does not assume the credit risk and it is the company which assumes the credit risk. 2. Factoring is an off balance sheet entry in the sense that both amount of receivables and bank credit are not shown in the balance sheet which is not the case with the bill discounting which is shown in the balance sheet. 3. In bill discounting there is only provision of finance while in factoring factor provides in addition to finance facility other facilities like sales ledger maintenance, collection advisory services etc.. 4. Discounted bills may be rediscounted several times before they mature for payment. Debts purchased for factoring cannot be rediscounted, they can only be refinanced. 5. In bill discounting the drawer undertakes the responsibility of collecting

the bills and remitting the proceeds to the financing agency, while the factor usually undertakes to collect the bills of the client.

6. Factoring implies the provision of bulk finance against several unpaid trade generated invoices in batches; bill financing is individual transaction oriented i.e. each bill is separately assessed and discounted.

7. Bills discounting does to involve assignment of debt as is the case with factoring.

more at http://www.citeman.com/4801-factoring-vis-a-vis-bills-discountinga-comparison.html#ixzz2dM0DiVe1 Invoice discounting is a form of short-term borrowing often used to improve a company's working capital and cash flow position. Invoice discounting allows a business to draw money against its sales invoices before the customer has actually paid. To do this, the business borrows a percentage of the value of its sales ledger from a finance company, effectively using the unpaid sales invoices as collateral for the borrowing. Although the end result is the same as for debt factoring (the business gets cash from its sales invoices earlier than it otherwise would) the financial arrangement is somewhat different. Contents [hide]

1 Features 2 Benefits 3 Drawbacks

4 See also 5 References

Features[edit source | editbeta] When a business enters into an invoice discounting arrangement, the finance company will allow the business to draw down a percentage of the outstanding sales invoices - usually in the region of 80%. It is possible to achieve a full 100% advance rate but this is typically only seen within the recruitment industry.[1] As customers pay their invoices, and new sales invoices are raised, the amount available to be advanced will change so that the maximum drawdown remains at the agreed percentage of the sales ledger.[2] The finance company will charge a monthly fee for the service, and interest on the amount borrowed against sales invoices. In addition, the finance company may refuse to lend against some invoices, for example if it believes the customer is a credit risk, sales to overseas companies, sales with very long credit terms, or very small value invoices. The lender will require a floating charge over the book debts (trade debtors) of the business as security for the funds it lends to the business under the invoice discounting arrangement. Responsibility for raising sales invoices and for credit control stays with the business, and the finance company will often require regular reports on the sales ledger and the credit control process. Invoice discounting is targeted at larger companies with established systems and an expected annual sales turnover in excess of 500,000; providers will need to be satisfied that the client can manage their own sales ledger administration and credit control facilities. References[edit source | editbeta] 1. ^ Touch Financial. "Invoice Discounting - A Flexible Cash Flow Finance Solution". Retrieved 4 June 2013. 2. ^ Business Link. "Debt factoring and invoice discounting: the basics". Retrieved 2008-11-01. 3. ^ The due diligence process in invoice discounting and factoring (Canada) ^ ABN AMRO Commercial Finance: "Missed Opportunities & The Invoice Finance