How is discounting of a bill of exchange a form of bank lending?

Bill discounting is a type of loan as the Bank takes the bill drawn by borrower on their customer and pays them immediately like a loan, deducting some amount as discount/commission The Bank then presents the Bill to the borrower’s client on the due date of the Bill and collects the whole amount on the bill.

What is discounting bills of exchange in banking?

Discounting of bill refers to the encashment of the bill before the date of its maturity. The bank deducts its charges from the bill. The bank shall make the payment of the bill after deducting some interest (called discount in this case). This process of encashing the bill with the bank is called discounting the bill.

What is the bill of exchange in banking?

A bill of exchange is a written order used mainly in foreign trade, requiring one party to pay a fixed amount of money to a different party, on-demand or at a set date. Exchange bills are similar to checks and promissory notes—they can be drawn by individuals or banks, and can usually be passed by endorsements.

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Is bill discounting a loan explain with reason?

The reason why bill discounting can improve cash flow is because it is a loan that financial institutions offer against payments that you expect to receive. But bill or invoice discounting loan requires you to pledge your invoices only. …

Is a bill of exchange a loan?

Most people are unfamiliar with a bill of exchange since it is not commonly used in domestic business transactions and is never used for personal loans. … A bill of exchange is an order to pay, not a promise to pay. The drawer directs its bank to pay the payee instead of paying the amount owed themselves.

What is discounting bill of exchange with example?


It is a paper signed by the debtor and the creditor for fixed amount payable on a fixed date. Example: suppose A buys goods from B, h may not pay B immediately instead give B a bill of exchange stating the amount of money owed and the time when A will settle the debt.

What do you mean by bills of exchange?

A bill of exchange is a written order used primarily in international trade that binds one party to pay a fixed sum of money to another party on demand or at a predetermined date.

What are the features of a bill of exchange?

What are the key features of a bill of exchange?

  • It must be a written document.
  • It must name all relevant parties.
  • It must be addressed from one party to another.
  • It must bear the signature of the party giving it.
  • It must outline the time when the money is due.
  • It must outline the amount of money that must be paid.
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Is Cheque a bill of exchange?

A cheque is a type of bill of exchange, used for the purpose of making payment to any person. It is an unconditional order, addressing the drawee to make payment on behalf the drawer, a certain sum of money to the payee.

What are the types of bills of exchange?

Types of Bill of Exchange

  • On the basis of time period; Demand Bill of Exchange. Term Bill of Exchange.
  • On the basis of objective: Trade Bill of Exchange. Accommodation Bill of Exchange.
  • On the basis of territory: Inland Bill of Exchange. Foreign Bill of Exchange.

What is bill discounting and why it is used?

Bill Discounting is a method of trading the bill of exchange to the financial institution before it gets matured, at a price that is smaller than its par value. … It aids the sellers to get funds earlier for working capital finance in exchange for a small fee or discount. It also helps the bank earn some revenue.

What is the difference between bill discounting and invoice discounting?

Difference between Bill & Invoice Discounting

While invoice discounting is meant to take a loan only against the unpaid invoices up to next 90 days, bill discounting is set up against all ‘bills of exchange’, and can be used to take a loan for bills due from 30 days to 120 days.

What is the difference between factoring and discounting?

Factoring is when a business sells its invoices to a third party and then the factoring company control the sales ledger and collects the debts. Invoice discounting is an alternative way of drawing money against your invoices. However, the business retains control over the administration of your sales ledger.

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What is bill of exchange answer in one sentence?

A 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 the instrument.

What is the main difference between a bill of exchange and a promissory note?

A bill of exchange is an unconditional written order made by the drawer on drawee to receive the specified sum within the mentioned period. Whereas, a promissory note is a written promise made by the borrower or drawer to repay the amount on a specific date or order of the payee.

How do you prepare a bill of exchange?

A bill of exchange normally includes the following information:

  1. Title. The term “bill of exchange” is noted on the face of the document.
  2. Amount. The amount to be paid, expressed both numerically and written in text.
  3. As of. The date on which the amount is to be paid. …
  4. Payee. …
  5. Identification number. …
  6. Signature.
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