Unlike conventional business loan products, bill discounting or invoice discounting helps entrepreneurs to fund short-term working capital needs by converting current assets into liquid assets. The entrepreneurs can avail funds in a faster and easier ways to selling their bills of exchange, promissory notes, unpaid invoices, or goods received notes to a lending institution before their due dates. The lending institutions providing bill discounting or invoice discounting services purchase bills and invoices at a discounted price.
They credit the amount to the seller’s account after deducting interest, fees, and administration charges. They even receive payment directly from the seller’s customer on the due date of the bill. There are always chances that lending institution may need immediate funds to meet a surge in demand for loans. Bill re-discounting refers to the process of discounting a bill or invoice for the second time before its due date. Often lending institutions re-discount bills or invoices to improve liquidity in a faster and simpler way. But before exploring more on bill re-discounting, the readers should read more on what is invoice discounting and what are the benefits of vendor bill discounting.
Understanding Important Aspects of Bill Re-discounting
- The lending institutions normally re-discount the bills or invoices which they have purchased from customers at a discounted rate.
- The percentage of discount is calculated as a ratio of actual data and 365 days. Hence, the amount of discount varies according to the due date of the bills or invoices being rediscounted.
- Each lending institution can discount a bill or invoice for the second time before it due date. But it cannot rediscount the bill for a period more than 90 days and less than 15 days.
- When a lending institution rediscounts a bill, it receives the principal amount after deducting the fees, interest, and administration charges.
- The buyer even credits the principal amount after deducting the discount, fee, and administrative charges.
- On due date of the bill, the buyer will present the bill to the borrower. He/she receive bill amount in full.
- While calculating discount, the buyer rounds off the amount to the nearest rupee.
On the whole, bill re-discounting can be defined as a transaction which enables lending institutions to avail immediate funds by discounting a bill of exchange, promissory note, or unpaid invoice for the second time. The Reserve Bank of India includes bills re-discounting in the list of businesses which a bank may transact. Both banks and non-banking financial companies (NBFCs) take advantage of bill re-discounting as a money market instrument to improve liquidity in a faster and simple way.