Although both Bill discounting/ invoice discounting and Factoring are the source of short-term working capital funds. The supplier/ exporter whether they small or medium utilise these financial services to arrange funds against the bill of exchange or invoice raised to the buyer/ importer from the financial institutions or agents which provide these kinds of services.
In this article, we will elaborate on the difference between Bill discounting and Factoring, but before I go ahead, we need to understand the concept of a bill discounting/ invoice discounting and factoring in brief.
Bill Discounting vs Factoring:
The Bill discount or invoice discount refers to the process of availing advance against the invoice raised prior to its maturity date from the financial institution like commercial banks. The banks examine the creditworthiness of buyer/ importer and date of maturity of the bill of exchange before sanctioning the amount to the seller.
Typically, the banks or financial institutions sanction a loan less than the invoice value and the difference will be fees/ interest charged by the banks.
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On the other hand, Factoring refers to such kind of services offered by the financial institutions or companies like SBI Factors, Canbank factors etc that provide advance against invoice or bills and then collect the receivables themselves from the buyer/ debtor. Such financial institutions are generally the subsidiaries of commercial banks.
There are typically two types of factoring services available.
- Recourse Factoring (Bad debt/ Unrecoverable bills are returned to the seller)
- Non-Recourse Factoring (Bad debt are borne by the factors)
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Now let us explain the head to head difference between bill discounting and factoring from the following table.
|Comparison Basis||Bill Discounting||Factoring|
|Meaning||It is simply trading of bill of exchange to the banks before its maturity date.||It is an agreement between seller and factor for advance as well as other services.|
|Processed Under||Negotiable Instrument Act, 1881||Not governed under such Act or laws.|
|Nature of Service||Service & Financing Agreement||Financing Agreement|
|Rights||No such rights are exercised||Have right to give notice to the debtor if not agree to pay the bills.|
|Types||Recourse Factoring &|
|No specific types|
|Collection of Receivables/ Dues||Seller himself collect the bills.||Factor collects the bills on seller's behalf.|
|Disbursement of Advance||Full payment |
(deducting bank charge)
|Upto 80% of bill value|
Difference between Bill Discounting and Factoring:
We can distinguish bill discounting/ invoice discounting from factoring on the basis of the following aspects.
As explained above, bill discounting is simply the trading of invoice or bill of exchange to the financial institutions before its due date (maturity date) at a discount.
On the other hand, factoring is an agreement between seller/manufacturer and the financial companies offering such services to raise funds against invoices. The responsibility of collecting invoices is delegated to the Factor on the behalf of seller/manufacture.
2) Processed Under:
The bill discounting is processed under the Negotiable Instrument Act, 1881 whereas factoring service is not regulated under such act and law.
3) Nature of Service:
The factoring is the kind of service agreement as well as the financing agreement whereas bill discounting is purely financing agreement.
The seller/ manufacture/ creditor transfer the rights to the factors for collecting his dues or payment own his behalf, hence the factor reserve rights to issue a notice to the debtor if not agree to pay on the due date.
However, in bill discounting no such right is assigned to the financer.
There are mainly two types of factoring services offered: With Recourse and Without Recourse, on the other hand, no such specific services are available in case of bill discounting.
6) Collection of Receivables/ Dues:
The Factor is responsible to collect the due bills/ invoices in factoring whereas in case of bill discounting, the creditor/ seller himself responsible to collect the bills and pay to banks on the due date.
7) Disbursement of Advance:
In case of bill discounting, supplier or creditor get the full payment after deducting interest/ fees as soon as the loan is approved, on the other hand, in factoring, the factor generally pays 70 to 80% of the total amount as per agreement and rest amount is paid after collecting final payment from the debtor.
8) Fees/ Interest:
The fee/ commission charged by the factors is typically upfront which is payable by the seller whereas in bill discounting the interest/ fee is charged at the time of disbursing loan ie. the loan is disbursed after deducting the interest, however, the interest rate depends upon how long is the maturity date of bills/ invoice as well as the creditworthiness of buyer/debtor.
9) Additional Services:
The factors/ factoring agents offer additional services such as maintenance of ledger, Non-recourse facility, Advisory services, legal assistance etc, on the other hand, in case of bill discounting, such services are not provided by the banks or other financial institutions.
Hope this lesson would be able to clear all your doubt regarding the difference between bill discounting and factoring. In a nutshell, we can conclude the above article within three points.
- The factoring is an agreement between seller and factor for collecting the seller’s receivables and advancing the funds with some additional services whereas bill discounting is only financing agreement availing the loans against the invoices.
- The factors undertake the service after evaluating the various things such as credibility of debtors, their previous records and creditworthiness whereas bill discounting facility depends on the creditworthiness of sellers with their banks.
- The factors typically pay up to 80% of the total invoice value and rest amount is paid after receiving the payment from the debtor, however, in bill discounting, once the advance/loan against the bills is approved by the banks or other financial institutions, the full payment is done to the seller/creditor, obviously after deducting the interest.