Discounting is the process of determining the present value of a future payment or stream of payments. The time value concept of money says - Cash in hand is always worth more today than it would be tomorrow. Bill discounting, or invoice discounting is sourcing working capital from future payables. Furthermore, the seller recovers a number of sales from the financial intermediaries before the due date.
In this case, the initial ownership of the invoices that were sold will still remain in control of the seller. It is most pertinent in cases when a buyer purchases goods from the seller and the payment is made through a letter of credit. This process is also called “Invoice Discounting”.
The Advantage of Discounting:
Features of Discounting in Trade
It often happens that a seller is eager to get payment in advance even before the goods are received by the buyer. Discounting the Letter of Credit is a short-term credit facility provided by the bank. Quick financial relief can be offered in case the buyer does not want to pay immediately or the buyer wants a longer credit period. LC discounting is beneficial to all the parties in the trade. The discounting of letters of credit makes it possible for exporters to get their money faster.
Bill discounting is advance selling of a bill to an intermediary before it is due to be paidI.t is a trade-related activity in which a company’s unpaid invoices which are due to be paid at a future date are sold to a financier. The customer will still pay the company directly, and not the third party. Therefore, the customer has no way or right to know about any discounting arrangement applied to the transaction.
Invoice factoring involves a third party that collaborates between the buyer and the supplier. The factoring third party purchases the company’s accounts receivables (unpaid invoices) at a discounted rate. This gives you access to a pool of funds that were tied up in the future. It also gives the third party higher value debt which will eventually pay. Reverse Invoice Factoring involves the third party committing by paying the company’s invoices at an earlier date in exchange for a discount.