There are many different ways to raise funds for your business and one of the most prominent of them is bill discounting. If you have never used bill discounting as a means to get instant funds, here is all you need to know about this efficient form of financing.
Bill discounting is a fee that the lender will take from the seller in order to release funds before the end of the credit period. The bill is eventually collected from the client and the lender receives a full amount against the same. Hence, if you make credit sales, you can enjoy funds instantly by discounting the bill. Bill discounting is ideal for scenarios where the buyer purchases goods from the seller and the form of payment is through a letter of credit. The arrangement allows the seller to recover an amount from an intermediary before its due date. It works best when you have a large bill amount. This is a form of business vertical where lenders are involved and you get immediate access to funds for a small fee. Considered as a major trade activity, this form of borrowing helps a seller to get funds on a small fee. Whenever the date of payment is due, the customer will pay back the money to them. The responsibility to collect money from the customer lies on the intermediary you have borrowed money from. In this method, you borrow the money you are liable to receive in the future. The funds are transferred to you sooner than its due date.
Bill discounting is also known as invoice discounting and the fees paid by the seller to the bank will depend on the time period before the maturity of the letter of credit for which the bill was discounted. Your credit score also plays a significant role here. If you are a business owner and do not want to pay huge amount of interest on the loan, this is the best way to get immediate access to funds. There are basically three parties involved in a bill discounting scenario. One is the payee, second is the drawer and third is the drawee. During bill discounting, the financier will get income from the discounting charges and you will get access to funds. For the payee, the person to whom the payment is to made will change.
As a business owner, it is important to be aware of the different borrowing options you have. You need to consider the pros and cons of every type of borrowing and then make a decision. Consider the cost involved in the process when you approach a lender. The entire process of discounting of the bill is transparent and hassle free. You simply need to approach the intermediary with your bills and get instant access to funds. It makes sense to use this form of borrowing if you have large bills and the processing fee for the same is minimal.