Running the business is indeed a tenacious process, but maintaining the liquidity of the business is definitely a tough nut to crack; even the major Fortune 500 companies have struggled with liquidity. Working capital is a leading problem for businesses, and it can make matters even worse if the businesses, by nature, depend more on liquid funds. Here, the role of short-term finance or loan comes into play, and one of the most trusted methods of short-term finance is Bill discounting or Invoice discounting. Bill Discounting shortens the process of the working capital cycle, which leads to the effective cost management and profitability of the business. The method is quite accommodating, especially for small and medium enterprises.
What is Bill discounting?
Discounting of a bill implies that the seller takes the amount against the invoice issued by him from the bank or any other financial institution before the due to of the invoice. The bank or financial institution charges the amount for making payment against the bill; The amount is called a discounting charge. Charges may vary based on the rate of interest and the period of maturity of the bill. We calculate charges from the date of discounting of the bill till the due date of the bill. The lender finances around 70-80 % of the amount of the invoice, depending on various factors.
Here is a detailed example of clear-cut comprehension –
E.g. Rohit and Virat are partners in a textile business. Rohit, a buyer, purchases raw materials from Virat, the seller, for ₹500,000 on credit. Due to Rohit’s reputation and consistent patronage, Virat agrees to extend payment terms. However, Virat is facing a temporary shortage of working capital. To bridge this gap, he presents Rohit with a bill of exchange, a legal document that formalizes Rohit’s obligation to pay the outstanding amount.
Virat approaches a finance company to discount the bill, a process that involves exchanging the bill for immediate cash in exchange for a fee. The finance company charges a 10% discount rate for 60 days.
To calculate the discounted amount, we first calculate the interest:
Interest = (Bill amount × Discount rate × Discount period) / 365
Interest = (₹500,000 × 10% × 60) / 365
Interest = ₹8,219.18 (approximately)
Subtracting the interest from the bill amount gives us the discounted amount:
Discounted amount = Bill amount – Interest
Discounted amount = ₹500,000 – ₹8,219.18
Discounted amount = ₹491,780.82
Therefore, Virat receives ₹491,780.82 after discounting the bill, allowing him to access immediate cash to address his working capital needs.
Why does the bill of discounting have such significance?
Bill discounting has a direct nexus with sound working capital as it ensures with smooth and free flow of business operations because the management of cash flow in running the business is highly crucial; e.g., In inter-departmental business, if there is even any minor obstacle due to cash flow which can affect or halt the operations in one department, then it will have a cascading effect on every other department. It can eventually lead to heavy losses. For instance, Lack of production of the material will directly affect sales, and fewer sales will shrink the budget for advertising and marketing. All these things will have an adverse impact on the financial health of the business.
Profitability Matters
Bill discounting ensures steady profits for the company. One of the most complex decisions in the business is to strategize the profitability of the company. Being free from late payment concerns and timely bill settlements provides a competitive advantage. It gives the room to contemplate the business decisions that can elevate the profits of the business that directly impact the business growth in the long run. Profitability with staunch liquid funds is crucial as it can also save the company from external risks like legal troubles, recession due to the low demand for the product, shifting the business to a different location, etc. Managing the cash flow of the company is a work of competitive intelligence because it will help the business to take advantage of market demand whenever it is required.
Value addition to the business reputation
Bill Discounting plays a crucial role in building the goodwill of the business as improved management of the liquidity of the business will lead to creating a sense of trust among the vendors as well as the customers which will eventually build a staunch reputation of the company. It will also increase the creditworthiness of the business which will not only enhance the financial health of the business, but the reputed financial institutions will also trust it.
Eligibility Criteria for loan
- The Minimum operational history of 1 year.
- Business Registration Certificate (Govt.). Documents required for loan
- Business registration Proof.
- KYC documents of the applicant and the business entity.
- Bank Statements for the last six months.
Minimize the hassle of loans.
For a layman, dealing with banks is quite a cumbersome process, especially when it comes to small or medium-scale enterprises, as they demand a lot of paperwork and collateral when it comes to any loan. Also, the recent crises of Non-banking Financial institutions (NBFC) and co-operative banks have made the trust even more firm for bill discounting companies in India among small businesses. Here, we at Indifi are committed to boosting small and medium enterprises by offering credit to those who have the potential and intent for the change. We have the technology and know-how to help examine the creditworthiness and growth prospects of the business.
Winding Up
As mentioned above, the bill of discounting has quite a significance in the form of a short-term loan. If managed efficiently, it can have a massive impact on the business growth and, most importantly, the position of the liquidity of the business. With the use of technology and expertise, it will give a serious boost to the business. Bill discounting is a healthy loan, which means it will appreciate the growth and brand value of the entity.