1 (Financial Instrument) What is Bill's Discounting HD

Case FE 5 - What is the Difference between Bills discounting and Factoring Solution - By Amlan Dutta Common Preface - I am seller of cars from India ...i get a 110 $ order in the month of january from Harry Ltd ( a buyer in USA )...the buyer seeks a 12 month credit for making payment ...i ship the car in the month of january itself but i wont be getting the payment now ...i really need the money though ....so , now using the bills , which will be paid only after 12 months , i have two options (1) Factoring Approcah a financial institution caled as a factor (say SBI /Mumbai )...ask it to buy the bill and pay me bill receivables i.e 110 $ upfront The factor checks the bills .If it isconvinced of the bill authencity and is willing to take th erisk of securing the payment from the buyer (Harry Ltd ), it buys the bills and pays me a factor i.e 90 % of 110 Rs say 100 Rs approx I get my cash needed .. The bank now approaches Harry LTD for the payment using the bills ...when harry makes the bank the payment , the bank returns to me the balance payment i.e 110-100 = 10 $ ... The bank charges from me a certain percent 0.45 - 1% of the contract valiue i.e 110 $ (depending on competition )...say it charges 1 %...i pay it o.9 $ Hope this is clear (2) Bills /Invoice discounting After having shipped the material in the month of january , i approach financial institutions who would be willing to buy my bills for doscounting What happens here is that the bills are duie for 110 $ a year later Say the present rate of interest offered by the bank is 10 % , the discounted rate today for the bills due after a year would be (110/1.1)-=100 Rs Say , SBI is convinced that the bills are genuine and would be willing to take on the buisness , it would discount the bills and give me the 100 Rs today It will buy from me the bills and now the onus of collectinmg payment from Harry LTD lies with SBI When SBI gets the payment i.e 110 $ , the balance 110 - 100 i.e the ineterest component si credite dto SBI account ....this is the reward that it gets for taking the risk of doscounting the bills , This is what the basic difference between Bills dioscounting and factoring means , Hope it is clear , Humble regards , Amlan Dutta Do check my tutorials for this subject .......