Trade financing can be understood from dissecting the term itself – Financing a trade. It can be done by financial institutions like banks and NBFCs.
Bill discounting is a mode of raising working capital for a seller who sells goods on credit. Since the period of credit could be long, hampering the working capital cycle of the seller, the seller may choose to sell the sales bill to the financial institutions at a discounted rate.
This is beneficial for all three parties i.e. seller, buyer, and financial institutions as the payment gets deferred for the buyer, no working capital is blocked for the seller and the financial institutions gain a good sum of money in the process. The term bill discounting is also interchangeably used with invoice discounting.
Types Of Bill Discounting
Bill discounting can be of the following nature:
- Recourse discounting: In some instances, it so happens that the buyer fails to pay even after the due date of the payment has lapsed. In such a case, the financial institution has a right to recover the amount due from the seller.
- Non-recourse discounting: This is exactly the opposite of recourse factoring wherein even if the buyer is unable to pay the financial institutions on the due date, the debt cannot be recovered from the seller. Under this method of discounting, the financial institutions deduct a higher sum from the bill amount as consideration towards higher risk.
- Spot discounting: When the seller discounts a single bill or invoice, it is called spot discounting. It is a preferred solution for the sellers, but the financial institutions are generally unenthusiastic about the same.
- Contract discounting: A minimum monthly volume of invoices factored or invoices pertaining to specific buyers discounted is called contract discounting.
Advantages Of Bill Discounting
Bill discounting is not a modern-day practice and has been existent since the times, the informal credit practice began. It has the following advantages:
- Bill discounting allows sellers to carry out their business without any actual blockage of working capital.
- It gives breathing space to the buyers as well. In business, it is common to face a cash crunch, and hence bill discounting helps the buyers to defer the payment till a future date.
- Bill discounting has proved to be a steady revenue stream for financial institutions.
- It helps free flow of money in an economy, thereby improving economic growth.
What Is The Role Of Bill Discounting Platforms?
The process of bill discounting is also done over an RBI approved Trade Receivable Discounting System platform called TReDS. This platform is set up to facilitate trade financing and bill discounting of MSMEs from their respective corporate buyers. It has three parties involved viz. corporate buyer, MSME supplier, and the financial institution.
The supplier uploads the invoice to be factored on the platform. The buyer verifies the invoice and approves the same. Once the invoice is approved, the financial institutions start bidding on the invoice. The bids are dependent on the buyer’s credit rating. The supplier can accept any bid-basis his own criteria. Once the supplier accepts the bid, payment is processed to the supplier by bill discounting platform who in turn receives the amount from financial institutions.
Due to the platform being digital in nature, complete transparency is maintained. Moreover, being RBI approved platform, it is completely reliable and trustworthy.
How Cygnet Can Help?
Cygnet has tied up with bill discounting providers to assist them in the bill discounting process. Cygnet’s software, FAME is a powerful decision-making platform designed for banks, NBFCs, and corporates to assess the creditworthiness of their loan applicants by combining the data from multiple sources including income tax returns, MCA data, bank statements, and GST data. FAME analyses the data from these sources to check the reliability of the buyer.
Additionally, under the current GST provisions, a buyer’s GST credit is dependent on the vendor’s compliances. If the vendor fails to furnish or furnishes inaccurate information in his GSTR 1, the buyer’s ability to avail of the credit gets hampered. Cygnet provides an invoice reconciliation tool that carries out end to end invoice reconciliation to minimise any ITC losses for the buyer.
With the help of this reconciliation tool, the corporates can reduce their ITC losses on account of non-compliance by vendors. Cygnet GSP, once authorised by way of OTP can download invoices that are available in the buyer’s GSTR 2A by vendors who are onboarded on the bill discounting platform. Further, the same can be reconciled with the buyer’s GSTR 2A to complete the loop and reducing ITC lost on invoices discounted on the platform.
Thus, Cygnet FAME is beneficial for the following two reasons:
- It analyses various reports and transactions to gather important data about the buyer’s creditworthiness
- It carries out invoice reconciliation which leads to minimum GST ITC losses for the buyer.
Trade financing and bill discounting are one of the most prevalent ways of financing in the country. With a formalised platform being made, the bill discounting activity has become simpler and transparent. However, with the aid of technology, such a platform can be used not only for bill discounting for purposes like GST reconciliations, making it even more useful. To know more – follow our next blog on Cygnet FAME. It was once said ‘What new technology does is to create opportunities to do a job that customers want done’.