Posted in Finance, Accounting and Economics Terms, Total Reads: 13320
Definition: Bill Discounting
Bill Discounting is a discount/fee which a bank takes from a seller to release funds before the credit period ends. This bill is then presented to seller's customer and full amount is collected. Bill Discounting is mostly applicable in scenarios when a buyer buys goods from the seller and the payment is to be made through letter of credit. When a buyer buys goods from the seller, the payment is usually made through letter of credit. The credit period may vary from 30 days to 120 days. Depending upon the credit worthiness of the buyer, the bank discounts the amount that needs to be paid at the end of credit period. Bill Discounting is also known as Invoice Discounting.
It means that the bank will charge the interest amount for the credit period as an advance from the buyer’s account. After that, the bill amount is paid as per the end of the time span with respect to the agreed upon document between the buyer and seller.
Bill Discounting is a major trade activity. It helps the seller's get funds earlier on a small fees or discount. It also helps the bank earn some revenue. The borrower or (seller's) customer can pay money on the due date of the credit period.