Bill discounting
A banking operation where a bank advances the holder of a bill of exchange its face value, less interest and commissions.
Bill discounting is a short-term credit operation where a bank advances to an exporter the amount of a bill of exchange (draft) before its maturity, less interest (discount) and commissions.
The mechanism works as follows: the exporter holds a draft accepted by the buyer (or avalised by their bank) with a future maturity. Rather than waiting, they present it to their bank which pays the amount minus the discount.
The discount calculation comprises:
- Interest: calculated at the discount rate on the remaining period until maturity
- Endorsement commission: service fee (0.1 % to 0.6 %)
- Bank days: additional days conventionally added (1 to 2 days)
Discounting is done with recourse: if the buyer does not pay at maturity, the bank turns to the exporter for reimbursement. This is the fundamental difference from forfaiting (without recourse).
This instrument is particularly useful for improving the cash flow of exporters who have granted payment terms to their foreign customers.