Difference Between Bill Discounting & Bill Purchase

Introduction

Steady cash flow is critical to keep operations of any business enterprise running smoothly. Unsettled bills can often hinder the regularity of receiving cash or fund. You can thus leverage the unpaid invoices in your books to secure funds immediately via bill financing. It’s a broad term with two primary subsets, bill discounting and bill purchase or factoring. Understanding differences is crucial to ensure that you seek the one most suitable for your business requirements.

Bill

How Bill Discounting Works?

Your business prepares invoices against the credit sale of goods or services.

You share the invoice details and corresponding bills with your lender.

This institution assesses the invoices and provides cash advance at a discounted rate against their value.

Your business’s credit controller then sets to collect payments from the debtors. When the invoices are settled, you repay the lender such a loan amount.

Bill Purchasing

The business sells its in-arrear bills to a financial institution, called the factor, which provides cash advances at a discounted rate against such invoice value.

The factor assumes credit control and the responsibility to recover payments from your customers/debtors.

Thus, your business debtors know that you’ve leveraged their invoices with a third party to raise funds.

How Bill Purchasing Works?

Invoice is generated against the sale of goods and services on credit.

You sell the bills to the factor.

The financial institution analyses the invoices and provides a percentage, let’s say 80% of their value as a cash advance. Such a lender then initiates the payment collection process. When your customers or debtors clear up their payment, the platform forwards you the remaining 20% of the invoice value, minus the service fee or interest.

Bill Discounting Bill Purchasing

Customer relationship

You undertake the responsibility of outstanding payment collection from your customers.

The lender collects the outstanding payment. Thus, your customer relationship may be affected.

You might choose to stick with bill discounting if you wish to retain the responsibility to collect payments from debtors.

You may opt to go with bill purchases if you think their payment collection process can be more effective than otherwise.

Common Advantages:

They provide access to instant financing without any collateral.

Businesses can streamline their cash flow with ease and efficiency, especially if credit terms vary across clients. They do not encumber the finances of a business.