Bill discounting is an arrangement that facilitates the inflow of working capital for exporters. Also known as invoice discounting or invoice factoring, such an arrangement can be made with a bank or a financial institution, where it releases funds to an exporter against the export invoice submitted.

The amount released is generally a portion of the invoice amount, and the remaining portion is released at the end of the credit period after deducting discounting fees and interest charges.

Bill discounting services are provided by banks, NBFCs, and fintech companies in India. The Reserve Bank of India (RBI) requires lender banks to obtain a no-objection certificate from borrower banks for bill discounting. Drip Capital's bill discounting offering provides collateral-free working capital through a paperless and speedy process at highly competitive rates.

What are the costs incurred?

To provide funds to an exporter before the end of the credit period of the invoice, financial intermediaries charge a fee. There are various financial intermediaries involved in this business vertical, and their services provide the exporter with working capital before the invoice is due.

The fee or discount charged by the intermediary is against this service, and it depends on the credit evaluation of the exporter, as the discounting intermediary is taking a non-recovery risk on the invoice.

How does it benefit exporters?

Bill discounting solves several problems related to one’s working capital management. It is apparent that, as an exporter, you will not receive payment against your export invoice immediately. A credit period will be negotiated with the buyer, and the amount will be released as per the agreed timeline.

If you are an exporter, bill discounting offers the following advantages:

  • You will be able to agree on a more relaxed timeline and offer a better credit period to the foreign buyer.
  • It is an ideal source of liquidity if you have exhausted your credit limits with your bank, or prefer not to go through banking channels for arranging the funds.
  • While negotiating the export order, you may have to yield a longer credit period to your buyer. This may be required to win new business even if your cash position does not favor extended credit periods. In such cases, bill discounting helps you ease the pressure on your financial position.
  • It also enables exporters to accept new export orders that they may not otherwise be able to carry out due to lack of resources.
  • The service is offered without any collateral and is facilitated at a very fast pace by discounting firms. Accordingly, it can act as the lifeblood of the growth of your export business.

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How is bill discounting done?

In a fintech company like Drip Capital, which is engaged in providing bill discounting services, there are four clear steps involved:

  • The first step is the submission of the invoice. This can be done online on the portal of the service provider. The in-house team then assesses the invoice, and the decision of whether or not to discount the invoice is taken.
  • Once approved, the bill discounting firm sanctions a major portion of the invoice value immediately. In Drip's case, around 80% of the value of the invoice is released by the firm.
  • The firm then holds on to the invoice until it becomes due. At the end of the credit period, the firm receives the amount receivable against the invoice from the buyer.
  • After receiving the amount from the buyer, the firm pays the remaining amount to the exporter. However, while doing so, the firm deducts the discounting fee and such other charges as agreed with the exporter at the time of bill discounting.

How is the amount repaid?

After the export invoice is discounted by the discounting firm and the payment is released to the exporter, the firm collects the invoice value from the buyer. The collection of the invoice amount from the buyer is done based on the agreement between the exporter and the foreign buyer. So, if a two-month credit period was agreed upon by both parties, the discounting firm will approach the buyer at the end of two months and recover the amount.

What are the consequences of non-payment?

If the importer fails to pay the invoice, the onus of payment falls on the exporter. In the case of banks, the exporter’s account is debited along with interest. Although the discounting charges are linked to the creditworthiness and evaluation made by these firms, many intermediaries may insist on collateral to protect themselves from the risk. Some may also manage this risk by obtaining insurance from credit guarantee agencies.

Drip Capital's model uses insurance from third-party agencies and therefore there is no requirement for collateral, nor is there a recourse to the exporter in the case of a buyer default. You can find out more about Drip Capital's offering here.

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