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What is Bill Discounting?
Let’s say you are a business entity that has just made a credit sale to another business entity. The credit period in our example is 2 months. However, you are currently facing a cash crunch and want the money as soon as possible. You could request the buyer to pay early, but he is not legally obligated to do so. The other option that you could go for is to discount the invoice with the bank. You present the bill, the bank verifies it and pays you for it after reducing their commission and interest. The bank will then collect the realization from the invoice at the end of the credit period. This process is known as bill discounting.
Advantages of Bill Discounting
Bill discounting has the following advantages for businesses:
- Nearly instant availability of cash.
- Frees up working capital.
- Interest rates are usually more attractive as compared to an unsecured business loan.
- Chances of bad debts are lower.
Challenges faced under the current bill discounting system
Despite the attractiveness of the bill discounting facility offered by banks and other financial institutions, it faces the following challenges:
- The facility is not practically accessible to small and medium-sized businesses since the banks tend to approve such facilities only where the invoice amount is large, and the payer is reputed and well established.
- There have been many cases of duplicate invoices – this leads to duplicate financing, which is a growing problem for small and medium enterprises as they make duplicate payments in respect of the same invoice.
- The process of verification carried out by financial institutions can be a bit tedious.
How does blockchain fit into the picture?
Blockchain uses a shared/distributed ledger technology that runs on a peer-to-peer (P2P) network. No record on this network can be tampered with. More information on this can be found here. Using blockchain for bill discounting arrangements can unlock the following benefits:
- The bill discounting arrangement can be executed using smart contracts – a feature available on certain crypto-networks like Ethereum.
- Credit Rating or the credit history of the participants can be stored on the blockchain.
- Faster processing and availability of funds by automating a majority of the process.
- Better availability of the facility to even small and medium enterprises that have a presence on the blockchain.
- No chance of fraud and duplicate invoices due to the security and transparency of the blockchain.
- All related transactions can be tracked on a real-time basis.
- The use of a distributed ledger system would allow access to data by all parties concerned.
Taking a broader view, the process of bill discounting with blockchain would be more efficient if the invoicing system itself existed on the blockchain. Let us look at India’s GST e-invoicing system. This system was developed to tackle the problem of fake invoicing and undue availment of Input Tax Credit (ITC). The Invoice Registration Portal (IRP) records the details of the invoices and generates a unique Invoice Registration Number (IRN). If the invoicing system used blockchain technology, the same issues would be addressed and would also lead to further benefits. It would be easier to execute arrangements like bill discounting also.Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.