Bill discounting is a source of working capital finance for the seller, who is providing goods on credit. It is an arrangement between the seller and a financial institution. Here the seller sells the sales bill to the institution before it becomes due. This institution would provide a discounted amount for holding on to the bill until it becomes due. Once due, the institution recovers the amount from the buyer. Generally, the bank or other institutions provide for 80% of the invoices, those are maturing within 90 days.

In the world of start-ups, SSI, and MSME, a lack of working capital may lead to the demise of the business. Any delayed payment, resulting in a shortage of cash, would prevent the businessman from taking a new order, as he wouldn’t be able to buy the raw material. The timing of receiving the payments matter more than the amount.


The mutually agreed payment terms, between Business A and B, is that A will provide goods worth Rs. 30,00,000 to B by May 30. Out of this, B will pay half, i.e. Rs 15,00,000 by July 15 and the rest by August 31.

Meanwhile, by May 25, B is awarded another contract by C, to sell goods worth Rs. 25,00,000. To produce this, B needs a working capital of Rs. 20,00,000. So he sells the first bill (of Rs. 15,00,000 by July 15) at a discounted price of, say 12%, to Bank X. and takes Rs. 13,20,000 (15,00,000-1,80,000) from Bank X.

The Bank X will approach C for payment of Rs. 15,00,000, the complete amount, on July 15.

How Invoice Financing works

Usually, the lenders do not lend the complete value of each invoice. They only fund anything between 75% to 90% of the invoice amount. This discounted money will directly go into your account, as soon as the application has been approved.

Invoice financing works in a manner that discounting is provided by a range of lenders.

On payment from the buyer, the lender will return the balance amount after charging for their lending fee.

The lending fee is, generally, 1.5% to 3.0% beyond base rates. Along with base rates, a management fee, 0.2% to 0.5% of turnover is added.

Difference between Bill and Invoice Discounting

The terms “Bill Discounting” and “Invoice Discounting” are used interchangeably. They both, essentially, mean the same thing.

The only difference is that Bill discounting is set up against all “bills of exchange”. and can be used to take a loan for bills due from 30 days to 120 days. Whereas Invoice discounting, only unpaid invoices up to the next 90 days can be discounted.

Features of Bill Discounting

Credit Evaluation

A bank will consider the goodwill of the seller as well as the past payment records of the buyer who needs to pay to the bank.

Banking Partners

The buyer, who is partnering with a good bank, and has a Good Credit Score, will ensure your bank that the paying party is reliable. The endorsement from the buyer’s bank will work in your favor.

Usance Bill

The period between the date of raising the bill and its payment is called the “Usance Period”. This period can vary between 2 weeks to 2 months. The bill has to be valid during this Usance Period. In other words, it should be a usance bill.

Bank to Bank Dealing

Invoice Financing transaction happens between banks where the buyer’s bank doesn’t need to intimate the seller of the reimbursement instruction. It deals, directly, with his bank, to determine the discounting terms.

Bill Discounting And Invoice Factoring

Bill Discounting

Bill Discounting: Bill Discounting Vs Bill Factoring: FinBucket

They are both facilities provided by banking and other financial institutions when they lend credit against unpaid invoices. Smaller businesses, such as a start-up, SSI, or MSME prefer invoice factoring. Whereas, bigger business entities with larger market base prefer the mode of bill discounting.

(a) The Invoice Factoring allows the lending institution with control over the sales ledger. Their responsibility would be to pursue the buyer to settle accounts and unpaid balances.

On the other hand, the seller retains control of its personal sales ledger, when opting for Bill Discounting. The payment to be followed as a regular process.

(b) In Bill Discounting, the buyer wouldn’t know about a third party being involved. Your buyer will pay you directly, the whole amount. This amount you have to forward to the lender.

While, in an Invoice Factoring transaction, the buyer is to clear the invoice with the lender, directly. Due to which, the buyer will, invariably, be conscious of your Factoring plan.

(c) If you have limited resources, especially, considering credit control and collection service, then Bill Factoring would suit you better.

But, when you have the resources, human and information, to efficiently manage your sales ledger and debt collection. And if you want your own company to deal with clients and debt collection, then it is advisable to choose Invoice Discounting.

Benefits of Bill Discounting and Invoice Factoring

With conflicting interests between the buyers and sellers of goods. The seller wishing for quick payments and the buyer preferring a longer credit period. Invoice Financing is the win-win solution to the problem. Invoice discounting is an easy way of getting finance. There are no hassles of sanctions etc.

Strengthens Cash Flow

Most Bill discounting lenders work faster than banks and have quicker processing time. They, sometimes, generate cash in as little as 48 hours.

Income for Banks

It is a business vertical for the financial institutions, NBFCs, that are providing the facility. A source of income that is less risky as compared with other types of finance or loan given by banks.

No need to Mortgage

Taking business loans without collateral, so there is no need to stop or compromise on operations.

More room for Credit Sales

With the option of credit sales getting converting into cash, your company need not bother about the liquidity issue that comes with credit sales.

Movement of Working Capital 

The cash that would have, otherwise, got locked up in unpaid bills, gets free quickly and the business operations can be undertaken.

On the other hand, a single late payment of a bill can put the whole business at risk.

Business Retains Control

Instead of chasing the clients for payment, this method does not alter the relationship between the business and the customer. The seller gets money on payment of charges. And the buyer is satisfied due to a longer credit period.

Easy to Expand

Bill discounting would increase working capital. That may result in business growth.

How to Choose the correct Lending Institution

There are many Invoice Financing or Factoring institutions in India. The variety of services they provide is huge. With them considering a lot many factors, such as the buyer’s profile, his credit score, location, duration, and amount of the invoices. It makes sense that you also conduct careful research before choosing the correct Payment Banks for your business and invoices. Here are the points to consider:

Frequency of Lender’s Contact with the client

As a small business, you should be concerned that your customers are not hassled by frequent reminders from the lender. Else it will result in you losing that buyer.

Especially, with Bill Factoring, the lender will communicate directly with customers and verify the invoices, etc.

This should be on pre-agreed terms so that your customers are preserved.

Time is taken to discount the bills

How quick the lending institution will process the invoices and provide a credit against it? Their speed matters a lot because this is the main reason that you are going for a discounted bill. Whether the lender will clear the loan in a matter of hours or days, is a crucial point to be considered.

At this point, the paperwork and approval processes, they require, are topics to be discussed before.

Recourse vs. Non-Recourse Factoring

Sometimes, the buyers are unable to pay on time.

UnderRecourse factoring, the lender would have the right to collect payment from you, if the buyer doesn’t pay within a reasonable time after its due date. This creates a problem since you would have had already spent the money on furthering the business.

Non-recourse factoring is when the lender would take the risk of non-payment of invoices. In such an option, even if your customer doesn’t pay the invoice on time, your business won’t be on the hook for it. However, the lender would be charging a higher discount at the time of payment, creating a new cash flow problem.

Some institutions offer partial recourse agreements.

You need to tread cautiously and read their entire contract carefully to make sure what they will and won’t be responsible for if your clients don’t pay the invoice or pay the invoice late.

Spot Factoring vs. Contract Factoring

Under Spot factoring, you get a single invoice discounted.

This may be preferred you, but the lender does not prefer to factor in this way. The time consumed and the cost involved, to discount one or several invoices is much the same. So, a single invoice will entail more work and not much money. It may push you on the back seat while processing the application and underwriting.

Contract discounting requires a minimum monthly volume or that every invoice to a specific buyer be factored in.

You need to decide whether you want to get into a long-term commitment required by contract discounting. Small businesses often have a variety of customers with different payment terms, and their financing needs may change, making the flexibility of spot factoring a better option.

You must try to keep the choice with you regarding which invoices to clear and when to clear them. This will gives your business a high degree of flexibility.

Industry Familiarity

The industry you and your customers operate in, affect the payment terms, you work on. The lending institutions that are familiar with the industry are more likely to understand the issues involved and would provide better discounting rates accordingly.

Only a few lenders may specialize in providing financing to specific industries. On the opposite side, some lenders do not provide financing to certain types of industries.

Hence you need to find a lender that understands the needs and norms of your industry. The objectives and conditions must be set out, clearly before deciding upon which lending institution to take a loan from.


This type of business loan allows payments to take place without disturbing the cash cycle as bill discounting allows SMEs to take loans against bills or invoices raised, thereby allowing businesses to run smoothly.

Invoice Financing is a method followed to make complete use of the company’s due accounts. If done appropriately, it will help you manage your cash flow efficiently. Our experts, at, will guide you through the best possible route.

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