The Complete Guide to Export Bill (Invoice) Discounting

When a seller wants to export goods, they start by sending a document called an Export Bill or Export Invoice to the buyer. This document includes details about what is being sold, how much there is, and its value. It also has important information about the shipping process to make everything clear.

A crucial part of the export invoice is the payment terms. This section tells the buyer when they need to pay for the goods and what the seller has to do before getting paid. For example, the invoice might say that the buyer has to pay in full 60 days after receiving a shipping document called a bill of lading, which shows the goods have been shipped.

For exporters in India, bill discounting is a helpful way to solve cash flow problems. It allows them to get money right away instead of waiting for the buyer to pay later.

What is Export Bill Discounting? 

Export bill discounting is a way for exporters to get money quickly by using their unpaid invoices as collateral for a loan from a bank or financial institution. Instead of waiting 30, 60, or 90 days for their customers to pay, exporters can go to a bank and ask for an early payment. The bank will evaluate the risk and provide the exporter with an advance, but they will subtract a fee from the total invoice amount. This fee is like interest on the loan.

In export bill discounting, the exporter is still responsible for making sure the customer pays. If the customer doesn’t pay, the bank will not take responsibility and will ask the exporter to cover any remaining dues. This is different from export factoring, where the financial institution pays the supplier directly and doesn’t treat the payment as a loan.

Sometimes, export bill discounting is supported by a letter of credit from the importer’s bank, which promises that the importer will pay the invoice. This is known as LC discounting. The letter of credit reduces the risk for the financial institution, making this type of discounting service cheaper for the exporter.

When the financial institution discounts the bill, they deduct a fee called discounting charges. This fee is essentially the interest on the money they advance to the exporter in exchange for their bills.

Overall, bill discounting helps exporters receive the value of their invoices much sooner than waiting the usual 30 to 120 days for payment from buyers.

Also Read: How Bill Discounting Can Help Exporters Like You

Key Features of Export Bill Discounting

Here are some of the key features of export bill discounting: 

1. Improves Cash Flow and Working Capital

Export bill discounting helps businesses get cash quickly, even when there’s a delay in receiving payment from buyers. International trade often takes time due to logistics, so sellers might have to wait longer for their money. This can create gaps in their cash flow and working capital. By using bill discounting, exporters can fill these gaps and keep their operations running smoothly.

2. Easy Financing Process

The process of export bill discounting is straightforward and convenient for sellers. Once the bank verifies that the exporter has a good credit history, getting funds is quick and doesn’t require much paperwork. This makes it a simple way for exporters to manage their working capital. Once set up, the exporter can use this service repeatedly whenever they need funds.

3. No Collateral Required

Unlike traditional loans, export bill discounting usually doesn’t require exporters to provide assets as collateral, especially when supported by a letter of credit. This means the exporter doesn’t have to worry about losing their assets if something goes wrong with the repayment.

4. Treated as a Loan

Export bill discounting is treated like a term loan, which means the exporter can enjoy the same tax benefits that come with taking a regular loan. This is different from invoice factoring, where the payment process is handled differently. With bill discounting, the exporter gets the advantage of handling it as a loan, which can be beneficial for their financial records.

Documents Needed for Export Bill Discounting

When exporters apply for export bill discounting, they need to provide certain documents to the bank or discounting company. Here are the key documents required:

• Bill of Lading: A document that shows the goods have been shipped.
• Commercial Invoice: A detailed list of the goods sold, including prices.
• Packing List: Information about how the goods are packed and shipped.
• Bill of Exchange: A document showing the amount to be paid by the buyer.
• Certificate of Origin: A document stating where the goods were made.
• Export Order Copy: A copy of the order placed by the buyer.
• Request for Discounting: The original and copies of the official request to discount the export bills.

To check if the exporter can be trusted to pay back the loan, the bank will also look at:

• Financial Statements: Documents showing the exporter’s financial health.
• Past Loan Repayment Records: Information about how the exporter has repaid past loans.
• Debtor’s Credit Score: The credit score of the buyer who owes money to the exporter.

These documents help the bank understand the exporter’s business and decide whether to provide the discounting service.

Benefits of Export Bill Discounting

Export bill discounting offers many advantages for businesses, such as providing immediate cash, not requiring collateral, and improving a company’s working capital. Here are some other ways it can benefit businesses:

1. Better Trade Negotiations

By improving a company’s finances and credibility, export bill discounting helps businesses maintain a steady cash flow. With more funds available, companies can negotiate better deals with suppliers and other partners. For example, they can place advance orders for materials and ask for discounts or special offers.

2. Stronger Customer Relationships

Export bill discounting allows businesses to offer flexible payment terms to their customers without affecting their cash flow. This flexibility can lead to stronger relationships with customers because they appreciate having more time to pay for their purchases.

3. More Funds for Growth and Diversification

When a company’s working capital is stable, it can focus on growth and exploring new opportunities. Export bill discounting gives businesses the financial confidence to invest in expanding their operations and trying new things, positively impacting more than just their working capital.

Downsides of Export Bill Discounting

While export bill discounting has many benefits, it also has some drawbacks that businesses should consider:

1. High Cost

Export bill discounting is often more expensive than other financing options because it doesn’t require collateral and offers many benefits. The high costs can affect the long-term profitability of exporters, which might make some businesses hesitant to use this option.

2. Strict Credit Score Requirements

To qualify for export bill discounting, companies usually need a very high credit score. This requirement can make it difficult for some exporters to access these services, especially if they have less-than-perfect credit histories.

3. Short-Term Solution

Export bill discounting is primarily a short-term financial solution. It helps businesses fill temporary gaps in cash flow and working capital but doesn’t support long-term growth or expansion plans. This makes it more of a temporary fix rather than a comprehensive financial strategy.

How Export Bill Discounting Works? (H2)

Export bill discounting is a process that helps exporters get paid early for their invoices. Here’s how it works step-by-step:

1. Invoice Creation

First, the buyer (importer) receives a payment invoice from the seller (exporter). This invoice is a promise that the buyer will pay the seller at a future date for the goods they are buying.

2. Submitting the Invoice

Next, the exporter submits this invoice to a financial institution or a discounting company. Some of these companies offer online platforms to make this process easier.

3. Invoice Verification

The discounting company checks the invoice to decide whether it can be discounted. They look at things like the exporter’s credit score, the accuracy of the invoice details, and the exporter’s trade history. If there are issues like a poor credit score or incorrect information, the application might be rejected.

4. Release of Funds

If the invoice is approved, the discounting company gives the exporter a large portion of the invoice amount, usually between 80-90%. This amount is called the advance payment. The company holds back the remaining 10-20% as a reserve.

5. Holding the Invoice

The discounting company keeps the invoice until the buyer’s payment is due. Once the buyer pays the invoice at the end of their credit period, the company receives the full payment.

6. Final Payment to Exporter

After receiving the full payment from the buyer, the discounting company pays the exporter the remaining amount of the invoice. However, they deduct a fee for their service, which includes their commission, interest, and any other charges.

Also Read: Export Factoring vs. Bill Discounting: Which Financing Option is Right for You?

Alternatives to Export Bill Discounting

While export bill discounting is a great way for exporters to get cash quickly, there are other options to help fill working capital gaps. Here are some alternatives:

1. Bill Purchases

In a bill purchase (also known as bill factoring), a financial institution buys the exporter’s invoices outright. This can be done with or without recourse, meaning the risk of non-payment by the buyer may stay with the exporter (with recourse) or shift to the institution (without recourse). Unlike bill discounting, bill purchases are not considered loans, so they don’t count against an exporter’s existing credit limits. They also require less paperwork.

2. Export Incentives

The Government of India offers various export incentive schemes to support exporters. Some of these include:

• Merchandise Exports from India Scheme (MEIS): Provides rewards to exporters to offset infrastructural inefficiencies and associated costs.
• Advance Authorization: Allows duty-free import of inputs required to manufacture export products.
• Duty Credit Scrips: These are certificates that can be used to pay customs duty on imported goods, helping reduce costs.

These incentives can provide additional financial support and reduce expenses for exporters.

Conclusion

Export bill discounting is a useful tool for exporters who need quick access to cash. It helps improve cash flow, supports working capital, and allows for better trade negotiations. While it has some drawbacks, like high costs and credit score requirements, it can be a valuable short-term solution. Exporters can also explore alternatives like bill purchases and government export incentives to meet their financial needs. By choosing the right option, businesses can effectively manage their cash flow and growth strategies.

Also Read: LC Backed Bill Discounting in Exports