Bill Discounting Agreement
Suppose a businessman sold $10,000 worth of goods to Mr. X, but Mr. X does not have the money to pay today, but Mr. X will surely pay after two months, then the businessman draws a bill in favor of the businessman that Mr. X accepts and promises to pay the amount of $10,000 after two months. The businessman cannot wait two months because he needs cash to finance his daily activities. Thus, he discounts the invoice with his bank 2 months before the due date with a discount rate of 18% per year. The bank pays the businessman an amount of $9,700 [$10,000 – US$300 (commission) after deducting a corresponding commission of $300. The businessman (drawer) sold the goods and was also paid without having to lose his client or the business, Mr. X received the goods by not having to pay today, and the bank earned a commission for updating the invoices. There are two types of bill discounting: interest rates for discount services are set on the basis of the bank`s perception of risk to its client. Rates vary from exporter to exporter. There are few factors that play an important role, for example.
B whether or not the invoices are secured by a credit. If the invoices are secured by a credit, this is the accreditation bank. If it is a good bank, the exporter will have a better price. If it is a lesser-known bank or minor transactions, the discount bank may refuse the transaction. Some institutions propose partial regression agreements. Sending invoices immediately after the end of the work is the key to success with invoice delivery, as it allows a steady influx of cash during the month. Once the agreed percentage of each invoice has been paid – usually between 80% and 90% of the total – you can get payment from your customer as usual. Both of these entities are provided by banks and other financial institutions when they lend against unpaid invoices.
Small companies, such as a start-up, SSI or MSME, prefer accounting factoring. While large companies with a larger market base prefer the type of accounting discounting. In summary, the account handover process offers a number of potential benefits for companies operating in all sectors….