Bill Discounting can be considered as a process of selling the bill to the third party which can be a bank or financial institution before its date of maturity, at an amount which will be less than its par value. The discount given against the bill is based on the remaining maturity time as well as the risk involved in it.
First of all the third party satisfies their firm regarding the drawer’s credibility, before advancing them with money. After knowing with the creditworthiness of the drawer, the financial institution will grant fund after deducting the relevant discounting charges or interest. When the financial institution purchases the bill for the client, it becomes the owner of the respective bills. If the client delays the payment, then he is supposed to pay interest as per prescribed rates.
Factoring is a transaction process in which the customer or borrower sells its book debts to the financial institution called factor at some particular discount. Having purchased receivables the financial institution finances, money to them after the deduction of the following:
Now, the customer forwards the collection of payment from its buyer to the financial institution or the customer may ask to forward the payment to the financial institution or to the factor to settle the balance dues. The factor provides the following services to the customer: Credit investigation along with debtors ledger maintenance, collection of debts from the buyer, credit reports on debtors and so on.
|Control of sales ledger has to be taken by the business||Control of sales ledger is taken by factor|
|Suitable for small businesses||Suitable for large businesses|
|No assignment of debit||Assignment of debit|
|Bill is discounted and paid when the transaction takes place||Maximum amount is paid in advance and the rest is paid at the time of settlement|
|Always recourse in nature||Can be recourse or non-recourse|
|Falls under negotiable instrument act, 1881||There is no specific law for factoring|
|Parties involved: drawer, drawee, payee||Parties involved: factor, debtor, customer|
|Financier charges fees in the form of discounting charges or interest||Factor charges fees in the form of interest and commission for the services|
In bill discounting, bills are used for transactions while in the case of factoring accounts receivable are sold to the factor. You should choose them as per the business needs and your own capabilities. In bill discounting the service of financing is provided by the bank whereas in factoring additional services are provided by the financier on interest rate and commission.