Pronunciation: BILL dis-KOWN-ting
Bill Discounting, also known as invoice discounting, is a short-term financing option where a business sells its unpaid invoices or bills to a financial institution at a discount to receive immediate cash. The business receives an advance payment while the bank waits for the customer to pay the invoice.
Ateek Textiles, an exporter of fabrics, supplied ₹50 lakh worth of materials to an American buyer on credit terms of 90 days. To manage its cash flow, Ateek Textiles decided to use bill discounting. It approached XYZ Bank and offered the invoice for discounting. The bank agreed to provide immediate cash, discounting the invoice at an interest rate of 8%.
XYZ Bank provided Ateek Textiles with 90% of the invoice amount upfront, transferring ₹45 lakh to the company. After 90 days, the buyer paid ₹50 lakh to XYZ Bank. XYZ Bank deducted the interest (₹4 lakh), and Ateek Textiles received the remaining balance of ₹1 lakh, completing the transaction.
During the Industrial Revolution in the 19th century, bill discounting gained popularity in Europe as businesses sought to access working capital quickly.