What is Bill Discounting?
Bill discounting is a type of short-term finance through which a company or a firm can fulfill its financial requirements in a less amount of type.
Bill discounting is a transaction where there is an advance selling of a bill to a third party (which can be a bank) before it is due to be paid.
Bank verifies the creditworthiness of the withdrawer before advancing a particular sum of money. After the bank concludes that the borrower is credible, the bank deducts the interest or discounting charges and grants the money to the borrower. The bank then purchases the bill on behalf of the customer and becomes the owner of the bill.
If the customer delays the payment, he or she will have to pay the interest according to the rate.
The advantages of bill discounting are:
- Faster access to funds is required for the company.
- The borrower pays back only the amount he used, unlike a business loan.
- Improves cash flow in the market.
What is Factoring?
Factoring is a type of transaction where the borrower (a company) sells its book debts to a financial institution. The financial institution purchasing the boom debts is known as a factor.
The factor purchases the company’s unpaid invoices at a discounted rate. It also deducts interest charges on financing services.
The process of factoring involves two steps. First, the company has to set up an account with the factor. It might take one to two weeks. Next, the factor asks for additional documents for verification and also does a detailed underwriting of the whole transaction.
If the funding gets improved, the company can withdraw funds as per the maximum limit.
Difference Between Bill Discounting and Factoring
Bill discounting is a transaction where there is an advance selling of a bill to a third party (which can be a bank) before it is due to be paid. Factoring is a type of transaction where the borrower (a company) sells its book debts to a financial institution
In bill discounting the concerned parties are the drawer, drawee, and payee. In factoring, the parties involved are the factoring company, the debtor, and the customer.
In bill discounting, only the option of recourse is available. In factoring, both recourse and non-recourse options are available.
Bill discounting is regulated by the Negotiable instrument act, of 1881. There is no specific law to govern factoring.
In bill discounting, a financer charges fees in the form of interest. In factoring, the financer gets fees in the form of interest for the financial services and commission for extra services they facilitate.
When the transaction occurs, the bill is discounted and paid. When the transaction occurs, the factor pays the maximum part of the amount as an advance.
Comparison Between Bill Discounting and Factoring
| Parameters of Comparison | Bill discounting | Factoring |
| Definition | Bill discounting is a transaction where there is an advance selling of a bill to a third party (which can be a bank) before it is due to be paid. | Factoring is a type of transaction where the borrower (a company) sells its book debts to a financial institution |
| Parties involved | The concerned parties are the drawer, drawee, and payee. | The parties involved are the factoring company, the debtor, and the customer. |
| Type | Only the option of recourse is available. | Both recourse and non-recourse options are liable. |
| Governing act | Negotiable instrument act, 1881 | There is no specific law to govern factoring. |
| Arrangement | When the transaction occurs, the bill is discounted and paid. | When the transaction occurs, the factor pays the maximum part of the amount as an advance. |