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Bill Financing 

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According to the Indian Negotiable

Instruments Act 1881,

“Bill of Exchange is an instrument in

writing containing an unconditional order,

signed by the maker, directing a certain

person to pay a certain sum of money only to,

or to the order of, a certain person, or to the

bearer of that instrument”.

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Promissory note

• A negotiable promissory note is unconditionalpromise in writing made by one person toanother, signed by the maker, engaging to pay

on demand to the  payee, or at fixed ordeterminable future time, sum certain inmoney, to order or to bearer.

• Bank note is frequently referred to as apromissory note, a promissory note made by abank and payable to bearer on demand.

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Bank notes

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Types of Bills

• Demand Bills.

• Usance Bills.

• Documentary Bills.

• Clean Bills.

• Inland Bills.

• Foreign Bills.

• Accommodation Bills.

• Supply Bills.

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BILL FINANCING

• A method of financing of trade activities through bills of 

exchange is known as ‘bill  financing’. It is also ‘bill 

discounting’.

• When the seller (drawer) deposits genuine commercial bills

and obtains financial accommodation from a bank or financial

institution, it is known as ‘bill discounting’. The seller, instead

of discounting the bill immediately, may choose to wait till the

date of maturity.

• Bills financing involves parties such as the drawer (seller), thedrawer (buyer) and the financier (banker).

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Mechanics of BILL FINANCING

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Precautions by Banker

• Credit standing & credit appraisal

• Complete bills

•

Genuine trade bills• Proper documentation

• Place of transaction

• Goods

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 Factoring 

• Factoring originated in countries like USA, U.K,France, etc where specialized financialinstitutions were established to assist firms in

meeting their working capital requirements bypurchasing their receivables.

•  Factoring is a financial transaction whereby abusiness sells its accounts receivable

(i.e., invoices) to a third party (called a factor) ata discount in exchange for immediate money withwhich to finance continued business.

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• Factoring is a financial transaction whereby a business sellsits accounts receivable (i.e., invoices) to a third party (calleda factor) at a discount in exchange for immediate moneywith which to finance continued business.

• Factoring differs from a bank loan in three main ways.

• First, the emphasis is on the value of thereceivables (essentially a financial asset), not thefirm’s credit worthiness.

• Secondly, factoring is not a loan  – it is the purchase of 

a financial asset (the receivable).• Finally, a bank loan involves two parties whereas factoring

involves three.

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Factoring & Forfaiting

• It is different from the forfaiting in the sense

that forfaiting is a transaction based operation

while factoring is a firm-based operation -

meaning, in factoring, a firm sells all itsreceivables while in forfaiting, the firm sells

one of its transactions.

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MECHANISM

• Under the factoring arrangement, the sellerdoes not maintain a credit or collectiondepartment. The job, instead is handed over

to a specialized agency, called the ‘Factor.’After each sale, a copy of the invoice anddelivery challan, the agreement and otherrelated papers are handed over to the Factor .

•  

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• The Factor, in turn receives payment from thebuyer on the due date as agreed, whereby thebuyer is reminded of the due date payment

account for collection.• The Factor remits the money collected to the

seller after deducting and adjusting its ownservice charges at the agreed rate.

• Thereafter, the seller closes all transactionswith the Factor.

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FACTORING AND OFF-BALANCE SHEET

FINANCING

• Under factoring arrangements, and while making

credit sales, the invoice is made in the name of the

Factor. The receivables become the assets of the

Factor.• The client’s debts are purchased by the Factor.

Hence, the finance provided by the Factor goes off 

the balance sheet, and the items appear in the

balance sheet only as a contingent liability in thecase of recourse factoring.

• In case of non-recourse factoring it does not appear

in the financial statement of the borrower

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Types of factoring

• Domestic

• Disclosed

•

Discount• Export

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FUNCTIONS OF A FACTOR

• Maintenance/administration of sales ledger

• Collection facility/of accounts receivable

•

Financing facility trade debts• Assumption of credit risk/credit control and

credit protection

•

Provision of advisory services

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