We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What Is Bill Discounting?

Malcolm Tatum
Updated Feb 27, 2024
Our promise to you
WiseGeek is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGeek, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Also known as a discounting of bill, a bill discounting is a process that involves effectively selling a bill to a bank or similar entity for an amount that is slightly less than the par value and before the maturity date associated with the bill of exchange. The debtor tenders payment to the new owner of the discounted bill in the full amount agreed upon originally. This approach allows the issuer of the bill to receive cash before the actual due date associated with the bill, while also allowing the buyer to make a modest profit on the cash advance extended to the bill’s originator.

One of the easiest ways to understand how bill discounting works is to consider a bill of exchange issued by ABC Company to its client, XYZ Company. ABC Company decides to cash in the outstanding bill in order to make use of the revenue now rather than later. To this end ABC approaches a bank with an offer to sell the bill for 90% of the par value. The bank looks over the transaction and decides the deal is viable. Upon approval, ABC receives 90% of the par value of the bill and instructs XYZ Company to remit payment to the bank. Once the bank receives full payment from XYZ, the deal is considered complete.

There are several factors that a financial institution will consider before choosing to enter into a bill discounting transaction. One has to do with the degree of risk involved with making the purchase. This will usually mean evaluating the debtor involved to determine what degree of risk exists that he or she will either settle the bill late or even default on the debt altogether. The amount of time that remains until the bill comes due is also a consideration, with institutions favoring a shorter duration between buying the instrument and receiving payment in full. Assuming the financial institution determines that the degree of risk involved is within an acceptable range, the transaction can be completed and the originator of the bill of exchange compensated with an agreed-upon percentage of the total par value of the bill.

Part of the bill discounting procedure will involve the creation of a contractual arrangement between the seller and the buyer of the commercial bill. Typically, the terms of the contract identify the percentage to be paid to the seller, and also include provisions that protect the buyer in the event that the bill is not paid according to terms. This may include the imposition of late fees or other charges, or even ultimately holding the seller liable for full payment of the bill discounting obligation if the debtor should default on the outstanding balance.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
By CrimsonWave5 — On Jan 23, 2014

Bill Purchase means purchasing a bill payable on demand and advancing to the seller.

Bill discount means bills payable after certain number of days. When Banks advance against these bills, it is known as Bills Discount.

Bills Negotiation enables you to receive payment as soon as your goods have been shipped simply on the basis of your trade transaction documents. Negotiation is ideal for your business if you do not have regular capital limits with the bank.

By roaringlion — On Jan 22, 2014

What are the definitions of bill purchase, bill discount and bill negotiation? What do these terms mean?

Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.