Understanding Purchase Bill Discounting: A Smart Financing Solution for Businesses

Purchase Bill Discounting 

In the dynamic world of business, maintaining cash flow is essential to ensure smooth operations. One such effective solution that allows businesses to manage their cash flow efficiently is Purchase Bill Discounting. It provides a way to unlock working capital by converting purchase invoices into immediate cash. This blog will take you through everything you need to know about Purchase Bill Discounting. 

Purchase Bill Discounting 

Purchase Bill Discounting is a short-term financing facility provided by banks or financial institutions where businesses can discount their purchase bills (invoices) to receive immediate funds. It helps companies manage their working capital requirements by avoiding payment delays from buyers. 

For example, if a supplier has issued a purchase bill with a payment term of 90 days, instead of waiting for the payment, they can get the invoice discounted and receive the funds upfront. 

Purchase Bill Discounting Important for Businesses 

Businesses often face cash flow gaps due to delayed payments from buyers. Purchase Bill Discounting allows them to meet their short-term financial obligations, pay suppliers, and invest in growth opportunities without waiting for payments. It also helps businesses maintain their creditworthiness by ensuring timely payments to their vendors. 

Purchase Bill Discounting Work 

Here’s a step-by-step breakdown of how Purchase Bill Discounting works: 

• A supplier provides goods/services to the buyer and issues a purchase bill or invoice. 
• The supplier approaches a bank or NBFC to discount the purchase bill. 
• The financial institution verifies the creditworthiness of the buyer and the invoice details. 
• Upon approval, the supplier receives up to 80-90% of the invoice amount in advance. 
• On the due date, the buyer pays the invoice amount to the bank. 
• The bank then releases the remaining balance to the supplier after deducting fees and interest. 

Benefits of Purchase Bill Discounting 

Improved Cash Flow: Get immediate cash without waiting for payment from buyers. 

No Collateral Required: The purchase bill itself acts as collateral, making it a hassle-free financing option. 

 Reduces Working Capital Gaps: Helps businesses meet short-term financial needs like purchasing raw materials, paying salaries, or covering operational expenses. 

 Faster Business Growth: The cash received can be reinvested in the business for growth opportunities. 

 Strengthens Supplier Relationships: Ensures timely payments to suppliers, improving your business credibility. 

 Who Can Benefit from Purchase Bill Discounting? 

Manufacturers 

Suppliers 

Traders 

Service Providers 

Small and Medium Enterprises (SMEs) 

 Types of Bill Discounting 

Documents Are Required for Purchase Bill Discounting 

KYC Documents (Aadhaar, PAN, Passport) 

Business Registration Certificate (GST, Incorporation Certificate) 

Bank Statements (Last 6-12 months) 

Purchase Bills/Invoices 

Financial Statements (Balance Sheet, Profit & Loss Account) 

Interest Rates and Charges for Purchase Bill Discounting  

The interest rate for Purchase Bill Discounting generally ranges between 8% to 15% per annum, depending on various factors such as: 

Creditworthiness of the buyer 

Invoice amount 

Loan tenure 

Financial institution's policies 

Apart from interest rates, the charges may include: 

Processing Fee: 0.5% to 2% of the invoice amount. 

Late Payment Fee: Applicable if the buyer delays the payment. 

Risks Involved in Purchase Bill Discounting 

Buyer Default Risk: If the buyer fails to pay the invoice amount, the supplier is liable to repay the bank. 

Credit Risk: The financial institution evaluates the creditworthiness of the buyer before approving the discounting facility. 

High Interest and Fees: Depending on the financial institution, the interest rates and fees may vary, which can affect profitability. 

Process of Purchase Bill Discounting 

Here’s a quick guide on how businesses can avail Purchase Bill Discounting: 

Step 1: The supplier issues a purchase bill to the buyer. 

Step 2: The supplier approaches a bank/NBFC with the purchase bill for discounting. 

Step 3: The bank verifies the invoice and the buyer’s creditworthiness. 

Step 4: Upon approval, the bank provides an advance amount to the supplier. 

Step 5: On the due date, the buyer pays the bank. 

Step 6: The bank releases the remaining balance to the supplier after deducting charges. 

FAQs on Purchase Bill Discounting 

Q1. Can startups apply for Purchase Bill Discounting? 

Yes, startups can apply if they have valid purchase bills and the buyer is creditworthy. 

Q2. Is collateral required for Purchase Bill Discounting? 

No, collateral is not required as the purchase bill acts as security for the loan. 

Q3. Can multiple invoices be discounted at once? 

Yes, businesses can discount multiple invoices depending on the financial institution's policies. 

Q4. What happens if the buyer defaults? 

If the buyer defaults, the supplier is responsible for repaying the amount to the bank. 

 Conclusion 

Purchase Bill Discounting is an essential financing tool for businesses looking to manage their working capital effectively. It provides immediate access to funds against purchase invoices, ensuring uninterrupted cash flow and business growth.  Whether you are a manufacturer, supplier, or service provider, Purchase Bill Discounting can help you meet your financial obligations without waiting for long payment cycles. 

Written by:  

CA Vikas Jain