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Managing cash flow is a constant challenge, especially for businesses that need to operate on short-term margins and fast-moving inventory. FMCG companies often find their working capital tied up in unpaid invoices, creating a significant gap between revenue recognition and actual cash flow. Without proper liquidity, businesses may struggle to meet operational costs, invest in growth, or take advantage of timely opportunities. This is where financial strategies like Bill Discounting and Bill Purchase come into play.

Both Bill Discounting and Bill Purchase help companies unlock cash from unpaid invoices, but they do so in different ways. Investors, financial professionals, and tech enthusiasts should understand these two methods because they directly influence how FMCG companies manage their short-term finances, structure their balance sheets, and maintain customer relationships.

This blog aims to comprehensively compare these two financial strategies, breaking down their applications, benefits, and risks. By understanding the key differences between Bill Discounting and Bill Purchase, FMCG companies can better assess which strategy suits their business model, operational needs, and risk appetite.

What is Bill Discounting?

Bill Discounting is a popular financial tool where a business sells its unpaid invoices to a financial institution or a bank at a discount. In return, the company receives immediate funds, typically a percentage of the invoice’s total value, with the remaining balance settled once the customer pays the invoice.

Purpose and Function of Bill Discounting

The primary purpose of Bill Discounting is to provide liquidity by converting unpaid invoices into cash. In industries like FMCG, where the working capital cycle is critical due to high inventory turnover and large-scale production, Bill Discounting becomes a way to ensure that the business is not starved of cash while waiting for customers to clear their invoices.

For example, a large FMCG company may have invoices worth ₹1 crore from multiple distributors, payable within 60 days. By discounting these invoices with a bank, the company can receive 90-95% of the invoice value upfront, allowing it to reinvest the money into production, distribution, or marketing efforts. This improves cash flow without waiting for customers to make payments.

What is Bill Purchase?

Bill Purchase is another financial strategy that aims to improve cash flow but with a different approach. In Bill Purchase, a financial institution buys the unpaid invoices outright from the company. The main distinction here is that the financial institution not only buys the invoice but also takes on the obligation of managing payment from the customer.

Purpose and Function of Bill Purchase

In Bill Purchase, the company selling the invoice no longer has to worry about customer payments, as the responsibility shifts to the financial institution. This method provides a stress-free cash flow solution for businesses that prefer to avoid handling the administrative burden of tracking payments and managing collections.

For instance, if a small FMCG business has issued ₹50 lakh worth of invoices to various customers, instead of waiting for each customer to pay, the company can sell the entire portfolio of invoices to a financier. The financier assumes responsibility for collecting payments and providing the FMCG business with immediate liquidity and a reduced operational burden.

Key Differences Between Bill Discounting and Bill Purchase

Both Bill Discounting and Bill Purchase serve to unlock cash flow, but their mechanisms differ significantly. Understanding these differences is crucial for any FMCG company to evaluate which option best suits its needs.

1. Collection Responsibility

• Bill Discounting: Here, the business retains complete control over the customer relationship and is responsible for collecting payment from the customer. The financial institution provides funds upfront based on the invoice value but is not involved in the collection process.
• Bill Purchase: Unlike Bill Purchase, the financial institution takes over collecting payment from the customer. Once the invoice is sold, the business no longer needs to interact with the customer regarding payment.

Key takeaway: In Bill Discounting, the business maintains customer relationships and collection control, whereas, in Bill Purchase, this responsibility is entirely shifted to the financier.

2. Impact on the Balance Sheet

Both methods are designed to provide working capital through liquidating unpaid invoices, but they impact the balance sheet differently.

• Bill Discounting: Treated as a liability on the company’s balance sheet because it operates like a short-term loan. The business is expected to repay the financier once the customer pays the invoice.
• Bill Purchase: The invoice is sold to the financier, meaning the transaction is removed from the company’s balance sheet. The financial institution carries the risk of non-payment, and the company does not have to repay the financier.

Key takeaway: Bill Discounting appears as a liability, whereas Bill Purchase offers a cleaner balance sheet with no obligation to repay.

Business Applications of Bill Discounting and Bill Purchase

When to Choose Bill Discounting

Bill Discounting is ideal for businesses with established credit control systems and strong customer relationships. FMCG companies are confident in their ability to manage and collect payments and prefer bill discounting because it allows them to maintain control over customer interactions. For example, suppose an FMCG business has long-term relationships with major retailers or distributors who will likely pay on time. In that case, Bill Discounting helps optimize cash flow without interfering with those relationships.

When to Choose Bill Purchase

Bill Purchase is better for companies that either lack the infrastructure to manage collections or prefer to offload that responsibility. Sometimes, small and mid-sized FMCG companies dealing with many distributors may find the collection process too time-consuming or resource-intensive. Outsourcing collections to a financial institution via Bill Purchase can significantly reduce operational strain, freeing up resources for core activities like production and marketing.

Loan-Like Nature of Bill Discounting and Bill Purchase

Bill Discounting: A Short-Term Loan

Bill Discounting can be seen as a short-term loan because the financial institution provides funds upfront, and the business repays the financier once the customer makes payment. If the customer fails to pay, the company may still be liable to compensate the financier, which introduces a shared risk model.

For example, if an FMCG company discounts an invoice for ₹10 lakh but the customer defaults, the company may have to bear a portion of the loss depending on the agreement with the financier.

Bill Purchase: Transferring Risk

In Bill Purchase, non-payment risk is fully transferred to the financial institution. Once the business sells the invoice, it is no longer involved in the collection process or liable if the customer defaults. While this can be beneficial from a risk mitigation standpoint, it often comes at a higher cost, as financiers charge more for assuming full responsibility for collections.

Key takeaway: Bill Discounting involves shared risk, while Bill Purchase transfers the entire risk to the financier.

Effect on Customer Relationships

Customer relationships are vital in the FMCG industry, where trust and repeat business drive long-term success. Choosing between Bill Discounting and Bill Purchase can impact how companies maintain these relationships.

Bill Discounting: Confidentiality Maintained

In Bill Discounting, customers are usually unaware that their invoices have been discounted. This allows the business to maintain confidentiality and direct customer communication, fostering stronger relationships.

Bill Purchase: Customer Notification

Customers are typically notified in Bill Purchase that the invoice has been sold to a third party. This may impact how customers perceive the business, as they now deal with the financier rather than the original company for payment. While this doesn’t always have a negative effect, in some cases, it could strain relationships, mainly if the financier uses aggressive collection tactics.

Key takeaway: Bill Discounting helps maintain confidentiality and strong customer relationships, whereas Bill Purchase may affect customer perceptions due to third-party involvement.

Real-World Examples in India

To put these strategies into perspective, let’s look at real-world applications within the Indian FMCG sector.

Example 1: Bill Discounting in a Large FMCG Company

A large FMCG company that supplies products to top retail chains uses Bill Discounting to maintain liquidity during high-demand periods. For instance, during the festive season, when sales surge but payments from distributors may be delayed, the company discounts invoices to access working capital quickly. Since the company has strong relationships with its distributors, it is confident in its ability to collect payments and prefers to retain control over the process.

Example 2: Bill Purchase in a Small FMCG Business

A smaller FMCG business that sells to a wide range of customers across the country might prefer Bill Purchase. Given the complexity of managing collections from numerous small distributors, the business opts to sell its invoices to a financier, thereby outsourcing the collection process. This allows the company to focus on scaling its operations without worrying about payment delays or defaults.

Final Words

Bill Discounting and Bill Purchase are effective financial strategies for FMCG companies to unlock working capital and manage cash flow. The choice between the two depends on factors such as a company’s control over customer relationships, risk appetite, and operational capacity to handle collections.

• Bill Discounting offers greater control over collections and is ideal for businesses with established customer relationships and robust credit management systems.
• Bill Purchase, on the other hand, provides a more hands-off approach, allowing businesses to transfer collection responsibilities and payment risks to a financial institution.

For businesses looking for expert guidance and seamless execution of either strategy, CashnTech provides industry-leading services in Bill Discounting and Bill Purchase. These services help companies optimize their cash flow and efficiently meet their working capital needs.

FAQs

1. What is the primary difference between Bill Discounting and Bill Purchase?

The primary difference lies in who collects the payment. In Bill Discounting, the business retains responsibility for collecting payments, whereas, in Bill Purchase, the financial institution collects fees from the customer.

2. How does Bill Discounting affect the balance sheet?

Bill Discounting is treated as a liability, as the company receives funds upfront and repays the financier after the customer makes the payment.

3. Can Bill Purchase reduce business risk?

Yes, in Bill Purchase, the financial institution assumes the risk of customer default, reducing the business’s financial risk.

4. Which option is better for improving customer relationships?

Bill Discounting is generally better for maintaining strong customer relationships because customers are typically unaware of the arrangement.

5. Which strategy is more suitable for small FMCG companies?

Small FMCG companies may prefer Bill Purchase, which allows them to offload the collection responsibility and focus on their core operations.