What exactly is a bill discounting?
Assume you are a business entity that has recently completed a credit sale to another company firm. In our example, the credit duration is two months. However, you are now in a financial bind and need the money as quickly as possible. You might ask the buyer to pay in advance, but he is not legally required to do so. Another alternative is to negotiate a reduction on the invoice with the bank. You provide the bill, the bank checks it and pays you after deducting their commission and interest. At the end of the credit period, the bank will collect the realization from the invoice. This is referred to as bill discounting.
The Benefits of Bill Discounting
Businesses benefit from bill discounting in the following ways:
- Cash is nearly instantaneously available.
- It liberates working capital.
- Compared to an unsecured company loan, interest rates are frequently more appealing.
- The likelihood of bad debts is reduced.
Problems with the present bill discounting system
Despite the allure of bill discounting services provided by banks and other financial organizations, it confronts the following challenges:
The facility is not practicable for small and medium-sized firms since banks often approve such facilities only when the invoice amount is significant and the payer is reputable and well-established.
There have been several instances of duplicate invoices, which leads to duplication funding, which is a rising issue for small and medium-sized businesses as they make duplicate payments on the same invoice.
The verification procedure used by financial organizations can be time-consuming.
What role does blockchain play in this scenario?
Blockchain is a peer-to-peer (P2P) network-based shared/distributed ledger system. On this network, no record may be tampered with. More information may be found on this topic here. The use of blockchain for bill discounting agreements can provide the following advantages:
The bill discounting arrangement may be carried out utilizing smart contracts, a capability accessible on some cryptocurrency networks such as Ethereum.
Participants’ credit ratings or credit histories can be kept on the blockchain.
By automating the bulk of the process, monies are processed and available faster.
Improved accessibility of the facility to small and medium-sized businesses with a blockchain presence.
Due to the blockchain’s security and openness, there is no possibility of fraud or duplicate invoicing.
All associated transactions may be traced in real-time.
The deployment of a distributed ledger system would allow all parties involved to access data.
Conclusion
In general, the process of bill discounting with blockchain would be more efficient if the invoicing system itself was on the blockchain. Consider India’s GST e-invoicing system. This method was created to address the issue of forged invoices and the unauthorized use of Input Tax Credit (ITC). The Invoice Registration Portal (IRP) stores invoice information and assign each invoice a unique Invoice Registration Number (IRN). The same difficulties would be solved, and additional benefits would accrue if the invoicing system utilized blockchain technology. It would also be easy to carry out agreements such as bill discounting.