How can you use bill discounting to improve cash flow?
When our payments are stalled or delayed, it displeases us all. Now imagine what businesses would do if they were in a situation where their payment is stalled or delayed. One of the ways that is used by many businesses to deal with such problems is bill discounting. In this blog post, you will know what bill discounting is and other information related to it. After developing a general understanding, you will get clarity on how to effectively use it to improve your cash flow.
What is bill discounting? Through the use of a financial mechanism called bill discounting, companies can turn their outstanding invoices into quick cash. In essence, a firm sells its bills to a factoring provider at a discount in exchange for an upfront lump sum payment. Types of bill discounting • Disclosed Bill Discounting: A traditional form where all parties are aware of the factoring company's involvement. The factoring company can collect the outstanding balance directly from the buyer.
• Undisclosed Bill Discounting: A confidential form where the buyer is unaware of the factoring company's involvement. Payments are made to a designated account controlled by the factoring company. • Full Turnover Bill Discounting: The business sells all of its trade receivables to the factoring company. • Partial Turnover Bill Discounting: The business selectively sells certain trade receivables to the factoring company. •
Letter of Credit-Backed Bill Discounting: The factoring company provides funding based on letters of credit issued by the buyer.
Types of bills that can be discounted • Trade Receivable: Also known as bills receivable, it is an invoice arising from the sale of goods or services on credit. It is the most common type of bill discounted. •
Bills of Exchange: These are formal written instruments that represent a debt owed by one party to another. It can be used in domestic or international trade.
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Promissory Notes: These are written promises to pay a specific sum of money on a specified date. They can be issued by individuals or businesses.
• Cheques: While cheques are typically used for immediate payment, they can also be discounted if they are postdated or if there exists uncertainty about payment. Benefits of bill discounting • Enhances cash flow, which in turn enhances the business’ working capital.
• No assurance or security is needed. •
When compared to regular loan applications, the paperwork requirements are less stringent. The money is credited in a timely manner in 24 hour.
Factors to consider before using bill discounting
After understanding every aspect of bill discounting, it is crucial to know about the factors to consider before using it. • Financial stability of a business Assess the financial stability of your business. It is crucial to verify that your firm can endure the temporary drop in cash inflow, as well as any potential delays in payment.
• Creditworthiness of the debtor
Take into account your clients' or debtors' creditworthiness and reputation. The risk attached to the invoices you submit for discounted will be evaluated by the bill discounting provider. The conditions of the discounting or even the provider's willingness to finance those bills may change if your clients have a history of missing payments or financial issues. •
Long-term effects
Evaluate how bill discounting may affect your company in the long run.
Even though it can bring you immediate cash flow, you must consider the long-term effects it will have on business profitability, relationships with customers and general financial health. These are a few factors from which you can understand how to utilise bill discounting to improve cash flow. In addition to all this, you need to find a platform that can help with bill discounting. Reserve Bank of India (RBI) gave license to Mynd Solutions Pvt. Ltd. set up the TReDS platform ‘M1xchange’ on April 7th, 2017 under the Payment and Settlement System (PSS) Act 2007, to facilitate discounting bills of exchange and invoices for MSMEs on a PAN India basis.
It helps MSME secure resources by transforming their trade receivables into liquid money on a non-recourse basis. With a special bidding process, the exchange has welcomed nationalised, private and foreign banks to finance these receivables at the most competitive rates. Conclusion
Delayed payments can be frustrating for any business. But what can be done when invoices go unpaid? One effective strategy is bill discounting. In this blog post, you’ve learnt what bill discounting is and how it can help improve your cash flow. M1xchange is an ideal TReDS platform that helps MSME secure resources by turning their trade receivables into liquid cash on a non-recourse basis.
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