Bill Discounting is a trade-related activity in which a company's unpaid invoices which are due to be paid at a future date are sold to a financier (a bank or another financial institution).

Bill Discounting is a discount/fee which a bank takes from a seller to release funds before the credit period ends. This bill is then presented to seller's customer and full amount is collected. This scenario is beneficial to all the parties involved in the process.

Bill Discounting is mostly applicable in scenarios when a buyer buys goods from the seller and the payment is to be made through letter of credit.

Parties in Bill Discounting

Bill Discounting is made possible by multiple parties working together for a scenario to enable movement of goods.
There are 3 main stakeholders:

Seller is the one who is selling the goods and expects the payment. in case of bill discounting, seller takes the payment from bank earlier than the credit period and gets funds immediately but after a discount which is charges as fee by the bank.

Buyer is the one who is buying the goods and is supposed to make or initiate the payment to the seller through letter of credit. In case of bill discounting the payment is made in full to the bank instead of the seller.

Bank acts as the intermediary in the bill discounting scenario by providing funds immediately to the seller on behalf of buyer within the credit period and collects the full amount from buyer as per LOC terms.