Even though bill discounting and bill negotiation serve more or less similar purposes, they are distinct from one another in several ways.
So, if you use them interchangeably – you may want to STOP right now!
To understand what we are hinting at, look at the differences between them from an exporter’s perspective.
Check out the section below to find more about it!
What Is Bill Discounting?
It is a useful trading activity that allows sellers to raise funds against unpaid invoices when they find themselves struggling with a liquidity crisis. In this process, an exporter approaches a bill discounting platform to trade bills at a discounted rate. This option is also popularly known as invoice discounting or accounts receivable discounting.
In most cases, the terms of repayment and sanctioned bill amount depend on customers’ creditworthiness. Creditworthy bills can fetch you 80% to 90% of the invoice amount and help you meet various cash-related requirements seamlessly.
Usually, reputed fintech companies like KredX take 24 hours to 72 hours* to disburse cash against the invoices. With the help of availed funds, exporters can replenish theirworking capital and account for everyday expenses more efficiently.
On maturity, the exporter is required to collect payment from customers. Following this, it extends the due balance plus the applicable finance cost to the invoice discounting platform.
The exporter does not lose his/her control over the company’s sales ledger through this process. Plus, he/she can keep this entire agreement confidential since the customer is kept out of this setup until the end.
What Is Export Bill Negotiation?
Typically, bill negotiation denotes that, after shipment, export documents are negotiated at a banking counter to draw out a facility. You must note that bills are negotiated for loads that are carried out under documentary credit.
Exporters need to be cautious when it comes to preparing papers under this documentary credit. They are required to ensure that the said bill is clean and does not contain any discrepancies.
These pointers elucidate export bill negotiation in brief –
- The exporter prepares essential documents after the export-related formalities are completed. Such documents are sent to overseas buyers to receive cargo delivery, and they include – commercial invoices, bill of lading, bill of exchange, packing lists, certificates of origin, quality certificate, etc.
- In case the shipment is made as per the terms of the letter of credit, exporters must ensure to meet all specifications detailed by the same.
- Once shipment documents are ready, they are submitted to the exporter’s financial institution that serves as his/her authorised dealer bank.
- The financial institution verifies whether all the terms and conditions of the letter are met or not, and then proceeds to negotiate the bills of export.
- The invoice amount is credited to the exporter’s account after bills are negotiated, and applicable charges are deducted.
- Once the overseas buyer’s amount is realised, the financial institution takes the discounted amount back after deducting the applicable interest amount.
Note that, you can also negotiate the invoice if the same shipment was carried out as per DAP (DP) or DA terms. After the overseas buyer’s amount is realised, the financier debits the applicable interest amount and the discounted bill value.
Through this above discussion, you may notice that bill discounting and bill negotiation are carried out differently and used in different conditions. However, the end purpose, i.e. to release capital tied in invoices, is the same.
Another noticeable point of difference is that, unlike bill negotiation, the process of bill discounting is quite relaxed and is not necessarily carried out as per stringent agreements of any LC or DA/DP.
Another difference is that clean bills are ideally negotiated and then credited to the exporter’s account only after it is accepted by the bank that issued the Letter of Credit in question. In the case of bill discounting, you can approach any platform to sell your accounts receivables to secure a cash advance.
Also, bill negotiation is considered a relatively less risky trade product from financiers’ perspective than bill discounting. It is mostly because bill negotiation is backed by a Letter of Credit.
Differences between LC Negotiation and LC Discounting
lc negotiation vs lc discounting stand as two distinct pathways. This exploration unveils their differences, aiding businesses in strategic decision-making for effective financial management in international trade.
Aspect | LC Negotiation | LC Discounting |
Process | Collaborative process involving buyer, seller, and banks for document verification and payment release. | Independent process where the seller leverages the LC as collateral to access immediate funds. |
Payment Timing | Payment upon successful document verification and compliance, can take time. | Quick access to funds by utilizing the LC as collateral, offering immediate liquidity. |
Risk Distribution | Shared risk between buyer’s and seller’s banks, with adherence to the LC terms and conditions. | Financial institution assumes the risk by providing funds to the seller against the LC’s value. |
Control Over Funds | Buyer retains control over payment release based on document verification. | Seller gains control over funds by independently accessing an advance from the financial institution. |
Buyer-Seller Relationship | Requires cooperation and communication between buyer and seller for document preparation and compliance. | Minimal impact on buyer-seller relationship as seller independently obtains funds from a financial institution. |
Documentation Complexity | Comprehensive document preparation and adherence to the LC’s terms and conditions. | Requires submission of documents to the financial institution for collateral assessment and fund disbursem*nt. |
Creditworthiness | The buyer’s creditworthiness influences the seller’s confidence in receiving payment. | Seller’s creditworthiness assessed by the financial institution to determine advance amount. |
Payment Guarantees | LC serves as a guarantee of payment upon meeting terms. | LC functions as collateral securing advance provided by the financial institution. |
Flexibility and Speed | Process duration may be longer due to verification and compliance procedures. | Quicker access to funds, catering to immediate financial needs of the seller. |
This table outlines the key distinctions between LC negotiation and LC discounting, providing a comprehensive overview of their respective attributes and implications in trade finance. Comparing LC Negotiation vs LC Discounting: While LC negotiation involves collaborative scrutiny of documents for payment release, LC discounting offers immediate funds against the LC’s value by using it as collateral.
Benefits of Bill Negotiation
Bill negotiation, also known as invoice negotiation or invoice financing, offers several benefits to businesses seeking improved cash flow and financial flexibility. Here are some key advantages –
Immediate Cash Flow
Bill negotiation provides businesses with rapid access to funds by leveraging their unpaid invoices. This immediate injection of cash can help cover operational expenses, investments, or growth initiatives.
Working Capital Management
By converting invoices into immediate cash, bill negotiation enhances a business’s ability to manage working capital efficiently. It allows for timely payments to suppliers and employees, ensuring smooth operations.
Risk Mitigation
Outsourcing the collection of outstanding invoices to a financial institution reduces the risk of non-payment and bad debt. The financial institution assumes responsibility for collecting payments from customers.
Flexible Financing
Bill negotiation is a flexible financing option that adapts to a company’s growth and cash flow needs. Businesses can choose which invoices to negotiate, tailoring the process to suit their specific requirements.
Maintaining Customer Relations
Unlike some other financing methods, bill negotiation allows businesses to retain control over customer relationships and the collection process. Customers may not even be aware of the financial arrangement.
Streamlined Process
The process of bill negotiation is generally efficient and streamlined. Businesses can avoid the lengthy procedures associated with traditional lending, making it an attractive option for quick financial solutions.
Catalyst for Growth
With improved cash flow, businesses can seize growth opportunities, invest in new projects, expand their operations, and explore markets that might otherwise be out of reach.
No New Debt
Bill negotiation doesn’t create additional debt on a business’s balance sheet. Instead, it leverages existing assets (unpaid invoices) to generate liquidity.
Accessibility
Bill negotiation is accessible to a wide range of businesses, including small and medium-sized enterprises, providing them with a viable means to manage their financial needs.
Customizable Solutions
Financial institutions often offer customizable bill negotiation solutions, allowing businesses to tailor the process to their unique circ*mstances and requirements.
Bill negotiation offers a range of advantages that contribute to enhanced cash flow, risk reduction, and financial flexibility. This financing method empowers businesses to maintain control over operations while strategically managing their working capital needs.
Bottom Line
Both bill discounting and bill negotiation help to release capital tied in invoices. However, the process involved and terms of usage vary significantly in both cases. This is why, even if some may use the terms interchangeably, they are quite distinct. Exporters ought to be smart about which option to avail at what time to meet liquidity crises more efficiently.
