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Bills Financing – Bills Discounting,
Advance against bills for collection
Bills are negotiable instruments where the buyer of the goods agrees to pay the drawer/ payee specified in the bill, the consideration for the goods availed by him after a specified period of time. On effecting sale of his products on credit, an entrepreneur could draw a bill on the purchaser and on his acceptance avail credit against the bill from his banker. Bank financing against bills is in the form of either discounting or purchase. In case of discounting, the banker credits the client’s account for the bill amount (less discount for meeting interest charges for a remaining number of days to maturity) and collects the bill as an agent of the client. In case of purchase, the banker assumes ownership of the bill and claims it in his own right. In either case, bankers retain the right of claiming the bill amount and incidental charges from their client in the event of dishonour by the drawee (buyer of the goods). Banks’ prefer financing bills as compared to financing based on invoices (Sundry Debtors). This is because the bill being a negotiable instrument attracts stringent legal provisions in case of default. Hence a banker has greater comfort that the transaction and terms of payment in case of a bill based transaction are genuine as compared to a transaction where the bank financing is on the invoice signed by the buyer of the goods. In order to induce the client to go in for bills based financing, banks often set aside a sub-limit exclusively for bills within the overall credit limit extended to the borrower. Bills financing has not achieved popularity on account of costs involved in drawing up the negotiable instrument (stamp duty, etc) and resistance by the buyers of the goods who find such instruments inconvenient on account of lower flexibility as compared to an invoice. In case of SMEs, the greater bargaining power enjoyed by the buyer results in a very low level of bill based transactions. Generally, banks do not insist on bill-based sub-limits within the overall credit limit extended to the borrower. Back to Types of Working Capital Financing Cash Credit |
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