What Is the Difference Between Bill Discounting vs. Bill Purchase in Exports?

As an exporter, your business keeps accepting international payments to India and you need to know about the RBI guidelines for inward remittance. But that is on the revenue side of your business. In this article we will talk about the ways in which you can meet capital requirements for your business.

The government of India has several schemes to provide exporters with finance trade solutions. This in many cases may apply to longer-term finance and more towards capital expenditure. As an exporter who sees a gap in the time for payments to land, but have commitments to meet, short-term finance options like bill discounting come in handy.

In this article, we will look at bill discounting vs. bill purchase as a means of short-term financing that exporters can avail against their receivables. We will see how they differ and which one will work for you in a given situation.

What is bill discounting?

In bill discounting, the seller, in this case the exporter will take his or her bill or invoice with the amount due to the bank before it comes due for payment to raise some funds. The bank will look at various aspects, including the financial records of the exporter, and discount the bill at an agreed upon rate and provide the funds.

In this case, the bill will still be owned by the exporter until payment is received from the buyer. If the buyer fails to make the payment, the onus on paying the amount will be on the exporter. The idea is to take your current asset (in this case a bill or invoice due) and raise funds on it. The banker will examine the authenticity of the document and the transaction and offer an amount that will have service charges and interest deducted from it.

What is bill purchase?

In this case too, the exporter will take a bill or invoice that is due to them to the bank to raise short-term finance. The bank after going through the process of examining the authenticity of the documents and credibility of the buyer and the exporter will purchase the bill from the seller (in this case the exporter).

The bank will offer an amount that is less than the total amount due by deducting interest and service charges. However, in this case the onus of collection from the buyer lies with the bank rather than the exporter. There is no liability on the exporter to make good the amount in case the buyer fails to make the payment.

Bill discounting vs. bill purchase: Which one is better for you?

Well, this is a difficult choice to make given that both the short-term finance options are very similar. However, there are some subtle differences we can discuss here to make the decision easier for you.

Ownership

In bill discounting, the invoice due becomes an asset that you pledge to raise funds but the ownership lies with you. In that sense, bill discounting seems like a good option.

However in bill purchase, the invoice or current asset is sold to the bank and this may pose its own benefits as it takes away a lot of responsibility to track and monitor payments from your end.

Risk

The risk in case of bill discounting due to non-payment still lies with you. As the seller, you will need to track the due date and ensure that the payment is made on time or the bank may pursue the amount due from you, making the risk a bit higher.

In bill purchase, the risk of non-payment gets transferred to the bank leaving you with space to concentrate on your core business rather than pursuing the buyer for on-time payment.

Customer relationship

In bill discounting, the customer relationship with your buyer remains intact and undiluted as your business will still liaise with the customer for payment details. For long term customers, this option looks more attractive.

In bill purchase, your relationship with the buyer can get diluted as the bank will step in to collect the amount due and may handle the entire process differently. If you have a short-term customer you are not sure about, then bill purchase could be the way to go.

As an international remittance platform, LeRemitt has a Trade Finance platform offering exporters working capital options. Avail of speedy credit post-export to keep your business running. Want to know how? Please click here to contact our team.