Bill Discounting, Bill Purchase and Factoring

Suppose I am supplying any material or providing any services to Government/ Semi Government organizations or reputed Public sector/ Private sector Companies, and my payment cycle is usually 60 to 90 days, Banks may purchase my supply bills. It means bank gives me 80% to 90% instantly on those accepted bills to help me with my cash flow. Banks charge interest on the amount advanced to me i.e. the difference of the bill amount and amount paid, till the bills are actually paid by my customer. This practice is known as Bills Discounting.

Technically speaking, bill discounting is the selling of bill to bill discounting company (banks, regulated finserv companies, financial institutions, NBFCs etc.) before the due date of payment at a value which is less than the bill amount. The difference between the bill amount and the amount paid is the fee of the invoice discounting company. The fee will depend upon the period left before payment date, the quality of the receivables and the perceived risk. They become due on a specified date say 60 or 90 days from the date of drawing, after which sales proceeds are realized from the buyer.

Advantages of discounting:
The buyers and sellers of goods have conflicting objectives. The seller wishes to get paid immediately and the buyer wants as longer credit period as possible. Bill discounting is the solution to the problem which creates win-win situation for both the seller and the buyer. The seller gets his money almost instantly on payment of a small charge and is able to satisfy its customer with credit period. The bill discounting is an easy way of getting finance. There are no hassles of sanctions etc. Moreover, bill discounting is a source of working capital finance for the seller of the goods on credit.
Flow Chart of Bill Discounting:

The bills under bill discounting are legally the “Bill of Exchange”. Usually, the following conditions are met before the bill is discounted by the financial institutions:
 A bill must be a usance bill
 The Bank will normally only discount trade bills
 Bill of exchange: It is raised by the seller duly endorsed by the buyer. The bill of exchange is drawn on the seller’s     letter head. It is a negotiable instrument and can be endorsed multiple times depending on the need of cash flow). Bill of exchange is a proof of sale on credit with specific time period.
 Original Invoice showing the details of the goods viz. value, quantity etc.
 Personal Guarantee (in some cases such as Purchase Bill Discounting)
 Release order showing that the stocks have been released to the buyer.

The conditions may vary from banks to banks for any bill discounting. Also, the charges connected to bill discounting depend on the Buyer-Seller relationship as who will pay the discounting charges.

Types of Bill Discounting:
 Sales Bill Discounting/Invoice Bill Discounting
 Purchase Bill Discounting
 Letter of Credit Bill Discounting

The terms ‘invoice/Sale discounting’ or ‘bills discounting’ or ‘purchase of bills’ are all same. They serve the same purpose.

Bill Discounting Scheme of Ministry of MSME, Government of India:
The Scheme covers purchase / discounting of bills arising out of genuine trade transactions i.e. purchase of supplies made by small scale units to reputed Public Limited Companies / State and Central Govt. Departments / Undertakings. It is implemented by National Small Industries Corporation (NSIC). NSIC facilitates Micro, Small and Medium Enterprises with a set of specially tailored scheme to enhance their competitiveness. NSIC provides integrated support services under Marketing, Technology, Finance and other Support service.

Bills drawn by small-scale units for the supplies made by them and duly accepted by the Purchaser are financed against security of Bank Guarantee in favour of NSIC. The period of unexpired usance of the bill should not exceed 90 days. The small scale units can fulfill any one of the following conditions to avail the bill discounting facilities:
a. The Bank Guarantee should be equivalent to value of the bill inclusive of discounting charges and service charges.
b. Bill of exchange duly accepted by large corporate units of good financial standing with a turnover exceeding Rs 200 Crores and net-worth exceeding Rs 50 crores and which are profit making for the last three years. In addition to that Personal guarantee of proprietor, partners of firms and Directors of the company should also be obtained.

The effective rate of interest varies from 12.40% p.a. to 13.40% p.a. based on the rating of the small scale units. The other charges include processing and service charges.

In simple terms, factoring is a financial option wherein the credit sales or account receivables are converted into cash immediately to finance continued business. In factoring, factor (financial institutions) buys the account receivables of a company on a discount. It’s an expensive method of financing but the risk of non-realization of payment entirely shifts on the factor. The seller’s customers are notified notification arrangement to make payment directly to the factor or, are not told about the arrangement, and continue to pay to the seller non-notification arrangement.

Example of Factoring:
M/s Ram receives an order for 100 machines from M/s Ethan. M/s Ram produces 100 machines and delivers them to M/s Ethan. M/s Ram raises an invoice of Rs.1 Crore on M/s Ethan with a credit period of 60 days. After 10 days, M/s Ram receives another order for 50 machines from M/s Alan. In order to fulfill the new order, M/s Ram requires purchasing of ancillary items (viz. bolt, nuts etc) to manufacture the machines and the capital to pay for the purchase. But M/s Ram does not have enough money for the same and the receivables from M/s Ethan are not due to pay for another 50 days. There is problem of working capital for M/s Ram. In such situation M/s Ram will avail the services of a factor. The invoices are sent to factor for financing working capital. The factor discounts the invoice value for 20% i.e. 20 lacs (these 20 lacs are kept as security by the factor in case of default) and gives the remaining 80 lacs to M/s Ram. When M/s Ethan finally pays after 60 days, the factor returns the rebate value i.e. 20 lacs to M/s Ram after deducting the operational cost
(varies from factor to factor).


1. Goods or services delivered to client and an invoice is raised on the client.
2. On an on-going basis, all such invoices of a pre-agreed buyer, along with supporting trade documents are assigned to Factor.
3. Factor advances pre-payment as early as the next business day on receipt of such documents (subject to being in order).
4. On settlement of the respective invoice by the buyer to Factor, the balance amount (if any) is credited to seller’s account.

Factoring Companies in India:
Canbank Factors Limited
SBI Global
IFCI Factors Limited
India Factoring and Finance Solutions Pvt Ltd
Global Trade Finance Limited
Export Credit Guarantee Corporation of India Ltd
Citibank NA, India
Axis Bank

Types of factoring:
a. Domestic and International factoring:

Financing of receivables by a factor within the country is called domestic factoring whereas cross-border sale transactions factoring is called international factoring. Domestic factoring involves only one factor while international factoring involves two factors known as two factor arrangement. Over 90% of the factoring done in India relates to domestic factoring.

b. Disclosed and Undisclosed Factoring:

Under disclosed factoring, client’s customers are informed of the factoring agreement, and are accordingly required to cooperate with the factor for future transactions and collections. On the other hand, in undisclosed factoring client’s customers are not informed of the factoring agreement. In undisclosed factoring, the debtor makes payments directly to the seller’s account, and the factor is not directly involved in the debt collection process. However, in disclosed type factor may or may not be responsible for the collection of debts depending on whether it is recourse or non-recourse.

c. Recourse and without recourse:

In recourse factoring, the collection of debts from the customer rests with the client. If the customer fails to pay on maturity, factor will recover the amount from the client. This is the most common type of factoring. Recourse factoring is offered at a lower interest rate since the risk by the factor is low. Balance amount is paid to client when the customer pays the factor. In non-recourse factoring, factor undertakes to collect debt from the customer and bears the credit risk in case of the buyer’s inability to pay. Balance amount is paid to client at the end of the credit period or when the customer pays the factor whichever comes first. The advantage of nonrecourse factoring is that continuous factoring will eliminate the need for credit and collection departments in the organization.

Advantages of Factoring:

a. It is an off balance sheet finance, thus it does not affect the financial structure. This would help in boosting the efficiency ratios such as return on asset etc.
b. Enables the company to meet seasonal demands for cash whenever required.
c. The factor provides specialized services with regard to sales ledger administration and credit control and relieves the client from botheration of debt collection. The client can concentrate on the other major areas of his business and improve its efficiency.
d. The advance payments made by the factor to the client in respect of the bills purchased increase the firms liquid resources. The client is able to meet his liabilities as and when they arise, thus improving client credit standing position before suppliers, lenders and bankers. The factor’s assumption of credit risk relieves him from the tension of bad debt losses. The client can take steps to reduce his reserve for bad debts.
e. It provides flexibility to the company to decide about extending better terms to their customers.
f. The company itself is in a better position to meet its commitments more promptly due to improved cash flows.
g. Saves the management time and effort in collecting the receivables and in sales ledger management
h. It ensures better management of receivables as factor firm is specialized agency for the same. The factor carries out assessment of the client with regard to his financial, operational and managerial capabilities whether his debts are collectable and viability of his operations. He also assesses the debtor regarding the nature of business, vulnerability of his operations; and assesses the debtor regarding the nature of business, vulnerability to seasonality, history of operations, the term of sales, the record of accomplishment and bank report available on the history.

ECGC (formerly Export Credit Guarantee Corporation of India), the fifth largest credit insurer of the world in terms of national exports coverage had launched a full-fledged factoring business in 2007 with the objective of promoting exports from the country by providing Credit Risk Insurance and related services of exports. It is wholly owned by Government of India, was set up in 1957.
Export factoring is a financial option for financing working capital, protection from credit risk, maintaining sales ledger and collecting export receivables from the buyer located in overseas country. ECGC enters into an agreement with the exporters to purchase export receivables, without recourse and assumes credit risks on the overseas buyer. If the buyer defaults, the payments for undisputed liability are made by ECGC.

Eligibility for ECGC’s Export Factoring Facility:
a. Micro, Small & Medium Enterprises, as defined in MSMED Act 2006.
b. Minimum 3 years experience in exports with good track record.
c. Satisfactory business or financial performance of the exporter for the previous 3 years.
d. Exports to acceptable buyers from A1 to A2 countries.
e. Exports on open account terms up to a credit period of 180 days.
f. Commodities other than Gold, Diamond, Gems, Jewellery, Iron Ore, Granite, and Software are eligible.
g. Assignment of account receivables.

Benefits of ECGC’s Export Factoring Facility:
a. Finance against Export receivable
b. Large working capital for growing companies
c. Without recourse finance on undisputed export bills
d. 100% Credit risk protection
e. Maintenance of sales ledger for transactions with a specific buyer.
f. Easy accessibility of finance for improvement in cash flow and opportunity to make use of supplier discounts
g. Increase sales in the overseas market by extending competitive credit terms.
h. Collection of export proceeds and recovery of unpaid bills
i. Lower cost compared to L/C transactions.

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