General Accounting

The Complete Guide to Export Bill (Invoice) Discounting

Like any other bills of exchange, export agreements usually begin formally when the supplier or seller issues an Export Bill or an Export Invoice. The invoice mentions the specifications, value and quantitiy of the goods being sold along with some relevant trade information to provide clarity on the logistics process etc.

Other important piece of information mentioned in the document is the payment terms for the export and details on when the invoice should be paid in full be the buyer.

The bill or the invoice mentions the obligation that the seller/exporter needs to fulfill and the number of days after which payment needs to be made by the buyer from the date of fulfillment of that obligation.

For example: Full Payment to be made 60 days after receipt of the shipping bill of lading.

For exporters in India, discounting of bills is a great export financing option to addrees immediate cash flow concerns.

What is Export Bill Discounting?
Export bill discounting is a method of invoice financing, it is simply a loan borrowed by a financial institution against export trade receivables. In this type of bill financing technique, the supplier (exporter) would approach a bank seeking early payment against receivables that are yet to be received within 30, 60 or 90 days.

The bank or the financial institution will ascertain the credit risk and will advance an amount after discounting the invoice and deducting its own fees. The advance is technically a term loan in which the export receivables act as the collateral.

In the event of default of payment, the bank assumes no responsibility and will chase the seller for remaining dues. This is in stark contrast to an export factoring service, in which the financial institution makes a direct payment to the supplier and the facility is not treated as a term loan at all.

An export bill discounting solution that is backed by a letter of credit document. Also called LC discounting, is basically a document issued by the importer’s bank which guarantees that the importer will process this payment against the invoice issued by the exporter.

The bill discounting institution can draw some comfort from this as it significantly reduces their risk and these types of export invoice discounting services are far cheaper as well.

When the financing company discounts a bill drawn by a seller, they deduct discounting charges on the document. This charge represents the interest on the company’s advance payment to a seller in exchange for their bills.

Bill discounting enables sellers to receive the amount on the face value of their bills receivable at the earliest instance instead of waiting for 30 to 120 days to get paid for the products they sell to their buyers.

Who Provides These Services?
In India, most companies that offer bill discounting services also provide export-specific discounting solutions. We at Drip Capital specialise in financing international trade transactions.

Simply get in touch with us through the form above and let our sales representatives get in touch with your team.

What Are the Features/Functions of Export Bill Discounting?
Bill discounting is easy to characterize through a few typical features. Some of them include:

Optimization of Cash Flows and Working Capital
There is always a time gap between a bill of exchange being generated and the receipt of payment at the seller’s end, creating gaps in their working capital and cash flows. Also, due to various logistical aspects, international trade frequently amplifies the transactional timelines between buyers and sellers. So, on several occasions, sellers may have to allow a higher credit period for their customers to make payments on purchases. As expected, this creates a gaping hole in the exporter’s working capital. Bill discounting companies help plug these holes quickly and optimize the working capital of sellers.

Simplification of Financing Procedures
Process-wise, export bill discounting is a relatively simple option to receive funds in exchange for trade receivables. The process of receiving funds in export bill discounting is characterized by its convenience for sellers. Once the creditworthiness of an exporter is verified, there is not a lot of documentation required for unlocking funds and the discounting process is relatively quick too. It a also a convenient type of working capital solution as once a process is set, the exporter can use this facility on a revolving basis easily.

Provision of Collateral Free Working Capital
Unlike working capital loans, export bill discounting generally does not require sellers to enlist their assets as collateral that will be seized if repayment defaults occur. This is especially so in case of LC backed export bill discounting solutions.

Treated as a Loan
Unlike Invoice factoring, export bill discounting is treated a term loan and its accounting treatment is similar to that of a term loan that is paid off. All tax benefits that a business can claim through a term loan, they can also claim through a bill discounting loan.

Documents Required in Export Bill Discounting Applications
Exporters need to provide the bank or bill discounting companies with trade validating documents such as bill of lading, commercial invoice, packing list, bill of exchange, certificate of origin, export order copy, the original and copies of the official request of discounting for export bills. To check creditworthiness, financiers will verify financial statements, past loan repayment records, debtors credit score, and similar other documents.

Benefits of Export Bill Discounting
Bill discounting is beneficial for businesses in many ways, with its immediate liquidity, absence of collateral, and optimization of a business’s working capital being some of its positives. Here are some of the other ways in which bill discounting positively affects businesses:-

Improved Trade Negotiations Bill discounting optimizes the working capital of sellers, thereby improving their finances and overall credibility. Using export bill discounting, businesses will rarely be short of funds. This availability of finances can help optimize trade negotiations with suppliers and other stakeholders. For instance, a seller can use the funds to place advance orders while procuring material and demand discounts and other offers for the same.

Improved Customer-Seller Relationships Export bill discounting allows international traders to offer more leeway to their customers regarding repayments. After all, through export bill discounting, such businesses’ working capital structures will not be affected by expanding their customers’ credit period.

Improved Budget for Expansion and Diversification A stabilized working capital allows exporters to create expansion and diversification strategies more ambitiously. In this way, export bill discounting positively transforms much more than just the working capital of an organization.

What Are the Downsides of Export Bill Discounting Services?
Export bill discounting and its standard LC-based counterpart share several features and, as it turns out, disadvantages, some of which include:

High cost of services Due to its collateral-free nature and host of other positives, export bill discounting services fall in the premium category of financing options. The higher expenses may affect the profitability of exporters for the long term. This may discourage businesses from choosing this option.

High credit score requirement Companies that provide export bill discounting services require their clients to have a near-perfect credit score before they can discount their bills of exchange. This may keep several exporters from ever availing the offer from a reputed financier.

Short-term financing solution Bill discounting does not financially fuel long-term exporter strategies and business growth plans. Rather, it simply resembles a stop-gap solution for businesses to plug gaps in their cash flow and working capital structures.

For most growing exporters, we at Drip Capital find invoice factoring solutions to be a far more superior financing alternative. Over the last 2 years, we’ve financed more than $3B+ in factoring solutions both in India & overseas. Get in touch with us to learn more.

How does Export Bill Discounting Work?
Here are the steps that are involved for an exporter using a bill discounting solution to avail funds:

Firstly, a buyer (importer) gets a copy of the payment invoice from their seller (exporter). The invoice guarantees that a payment will be made at a future date to the seller (the exporter) for the goods they’re purchasing.
After this, the exporter needs to submit the invoice to a financial institution. Some institutions provide a tech-enabled online platform for discounting bills for this purpose.
The discounting company will verify the invoice before arriving at a consensus on whether the invoice should be discounted or not. Some of the reasons for the rejection of discounting applications may be below-par exporter credit scores, misrepresented financial figures on the invoice, or any record of malpractice in the exporter’s trade history.
On approval, the discounting company goes through with releasing a percentage of the amount specified on the invoice to the exporter. This percentage generally is in the 80-90% range. The remaining 10-20% is known as the reserve rate of funds deducted before the release of the funds. For now, the discounting company does not pay the entire amount receivable by the exporter.
The discounting company retains the invoice up to its due date. The buyer pays the amount specified on it at the end of their credit period.
After the money is received, the company pays the remaining percentage of the invoice amount to the seller. The company keeps a cut of the money as its commission (known as its discounting rate), interest, and other charges if any.
Alternatives to Export Bill Discounting Solutions
Wile discounting export invoices is a great trade financing solution for exporters looking to secure cash at a decent financing cost and through proper channels.

However, here are a few other ways in which exporters can solve for working capital gaps.

Bill Purchases: Unlike bill discounting, a bill purchase or a bill factoring service is an arrangement where the financial institution outright purchases the trade receivables, either with recourse or without recourse. Since this is a sale of an asset, it is not treated as a loan and exporters can avail this service over and above their current financial limits and the documentation required is far lesser as well.
Export Incentives: Various export incentive schemes are launched by the Government of India, including the MEIS scheme, Advance Authorization and Duty Credit Scrips.
FAQs on Export Bill Discounting
Some of the most common doubts regarding bill discounting are cleared here.

How to repay the amount financed by the bank under export bill discounting?
Once the agreed due date for paying the amount on a dated invoice arrives, the discounting company is expected to receive the payment from the importer of goods. The company approaches the importer to collect the money. After collection, the company pays the amount it retained (minus fees) from the seller’s invoices.

What is the difference between export bill discounting and export bill negotiation?
Bill negotiation is a term that is likely to be mistaken for bill discounting. Here are some differences between the terms:Table on difference between export bill discounting and export bill negotiation

What happens if discounted export bills are not paid?
Bill discounting companies may employ various methods to ensure that, more often than not, they do not face losses due to non-payment of bills. Some companies, for instance, may partner with credit guarantee agencies to safeguard themselves from risks. Also, some companies may add the element of collateral to their solutions to avoid risks. Some financiers may rely on third-party agencies to plug the financial gaps in case of repayment defaults.

The seller may see their creditworthiness and chances of getting bill discounts in the future dented due to the non-repayment. Some firms may even take legal action against the sellers for non-repayment.

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