Managing day-to-day cash flow remains one of the biggest operational challenges for growing businesses. Delayed customer payments, extended credit cycles, and seasonal demand can strain working capital even when sales are healthy. To bridge this gap, many businesses turn to invoice-based financing options such as bill discounting and factoring.

Although both solutions help unlock funds tied up in receivables, they differ significantly in structure, risk allocation, cost, and control. Understanding these differences is essential before choosing the right financing method. This article examines bill discounting and factoring in depth, compares their processes, and explains when each option is best suited for a business.

Bill Discounting and Factoring: A Practical Comparison

At a high level, both bill discounting and factoring allow businesses to access funds before invoice maturity. The key distinction lies in ownership, collection responsibility, and credit risk.

In bill discounting, the business continues to own the receivable and remains responsible for customer collections. The lender simply advances funds against the invoice for a fee. In factoring, ownership of the receivable is transferred to the factoring company, which then manages collections and, in some cases, assumes the risk of non-payment.

These structural differences directly affect confidentiality, pricing, and operational involvement.

What Is Bill Discounting?

Bill discounting is a short-term financing arrangement where a business submits its unpaid invoices to a bank or financial institution in exchange for immediate funds. The invoice value is discounted, and the remaining amount is paid to the business upfront.

Importantly, the ownership of the invoice does not change. The business remains accountable for ensuring that the buyer pays on the due date.

For instance, if a company raises an invoice worth ₹1,00,000 payable in 60 days, it may receive around ₹94,000–₹97,000 immediately, depending on the discount rate. This enables the business to meet payroll, pay suppliers, or manage operational expenses without waiting for customer payment.

Bill discounting is widely used by MSMEs and corporates seeking cost-effective working capital finance without disrupting customer relationships.

What Is Factoring?

Factoring involves selling accounts receivable to a specialised financial entity known as a factor. Once invoices are assigned, the factor advances a portion of the invoice value—typically 80% to 90%—to the business.

Unlike bill discounting, factoring generally includes collection services. The factor communicates directly with customers, tracks payments, and handles follow-ups. In non-recourse arrangements, the factor may also absorb the risk of customer default.

Factoring is often preferred by businesses that want to outsource receivables management, reduce administrative overhead, or mitigate credit risk associated with uncertain buyers.

How Bill Discounting Works

The bill discounting process follows a structured and relatively straightforward flow:

1. Invoice Issuance
   The business supplies goods or services and raises an invoice with a defined credit period.
   
   

2. Invoice Acceptance
   The buyer formally accepts the invoice, confirming their obligation to pay on the due date.
   
   

3. Submission to Financier
   The seller submits the accepted invoice to a bank or approved financial institution.
   
   

4. Credit and Document Verification
   The financier evaluates invoice authenticity and buyer creditworthiness.
   
   

5. Funds Disbursal
   Upon approval, funds are released after deducting the discounting charge.
   
   

6. Invoice Settlement
   On maturity, the buyer pays the invoice amount directly to the financier.
   
   

Digital platforms such as the Receivables Exchange of India Limited (RXIL) TReDS platform have streamlined this process by enabling transparent, multi-financier bidding and faster access to working capital for MSMEs.

How the Factoring Process Operates

Factoring follows a more service-oriented model:

1. Invoice Generation
   The seller raises invoices on customers as per normal business operations.
   
   

2. Invoice Assignment to Factor
   Selected invoices are sold to a factoring company.
   
   

3. Initial Advance
   The factor releases an agreed percentage of the invoice value upfront.
   
   

4. Collection and Follow-ups
   The factor assumes responsibility for collecting payment from customers.
   
   

5. Final Settlement
   Once payment is received, the balance amount is released to the seller after deducting factoring fees.
   
   

This model provides liquidity along with operational relief, particularly for businesses with limited credit control resources.

Parties Involved in Bill Discounting

Bill discounting typically involves three parties:

• Drawer (Seller):
  The business that raises the invoice and seeks early funds.
  
  

• Drawee (Buyer):
  The customer obligated to pay the invoice on maturity.
  
  

• Bank or Financial Institution:
  The entity providing funds against the invoice and collecting payment on the due date.
  
  

Parties Involved in Factoring

Factoring includes the following participants:

• Seller:
  The business selling receivables.
  
  

• Buyer:
  The customer responsible for invoice payment.
  
  

• Factoring Company (Factor):
  The entity that purchases receivables, advances funds, and manages collections.
  
  

Types of Bill Discounting

Bill discounting can be structured in multiple ways depending on documentation and disclosure:

Clean Bill Discounting

Funds are advanced without extensive supporting documents. This option is quicker but may carry higher scrutiny or limits.

Documentary Bill Discounting

Invoices are supported by delivery proofs and transaction documents, adding security for the financier.

Disclosed Bill Discounting

The buyer is aware of the financing arrangement, and payments are routed directly to the financier.

Undisclosed Invoice Discounting

The buyer remains unaware, allowing the business to maintain confidentiality while improving cash flow.

Types of Factoring

Factoring arrangements vary based on risk and geography:

Recourse Factoring

The seller remains liable for unpaid invoices. Fees are lower due to reduced risk for the factor.

Non-Recourse Factoring

The factor assumes the risk of customer default, offering protection at a higher cost.

Domestic Factoring

Used when transactions occur within the same country.

Export Factoring

Supports international trade by managing overseas receivables and mitigating cross-border payment risks.

Choosing Between Bill Discounting and Factoring

The choice between bill discounting and factoring depends on business priorities:

• Businesses seeking lower-cost, confidential financing often prefer bill discounting.
  
  

• Companies looking to outsource collections or reduce credit risk may opt for factoring.
  
  

• Firms with strong customer relationships and credit control systems generally benefit more from bill discounting.
  
  

• Businesses expanding into new markets or dealing with uncertain buyers may find factoring more suitable.
  
  

Understanding customer payment behaviour, internal resources, and cash flow urgency is key to making the right decision.

Conclusion

Both bill discounting and factoring are effective tools for improving liquidity, but they serve different strategic purposes. Bill discounting offers faster access to working capital while retaining control and ownership of receivables. Factoring provides liquidity along with collection support and, in some cases, credit risk protection.

By carefully assessing operational needs, cost considerations, and customer profiles, businesses can select the financing approach that supports sustainable growth and financial stability.