## Bills Discounting vs Factoring

### What is Bills Discounting?

Bills discounting is when banks advance funds against the security of bills of exchange. When a bill is discounted, the borrower receives the present worth (face value minus discount charges for the unexpired period).

### Key Differences

Aspect	Factoring	Bills Discounting
Name	'Invoice Factoring'	'Invoice Discounting'
Parties	Client, Factor, Debtor	Drawer, Drawee, Payee
Nature	Management of book debts (sale)	Borrowing from commercial banks
Governing Law	No specific Act	Negotiable Instruments Act applies
Services Provided	Collection, ledger, credit risk, finance	Only finance
Off-balance-sheet?	Often yes (non-recourse)	No — remains a liability

### Practical Implications

In factoring, the factor TAKES OVER the receivables and manages them.
In bills discounting, the bank only ADVANCES money — collection and credit risk usually stay with the firm.
Factoring is a service-plus-finance arrangement; bills discounting is pure financing.

Worked example

### Example 1

Scenario: A trader holds a 90-day bill of ₹1,00,000. The bank discounts it at 12% p.a.

Discount = 1,00,000 × 12% × 90/360 = ₹3,000.
Trader receives ₹97,000 immediately.

If the same ₹1,00,000 were factored at 2% commission with 85% upfront, trader would receive ₹85,000 now and ₹13,000 later, with collection handled by the factor.

⚠️ Common exam mistakes

Stating that 'both are borrowing' — factoring is a sale, not borrowing.
Saying parties are the same — they have different names because the legal structure differs.
Forgetting to mention the Negotiable Instruments Act for bills discounting.

Reference:

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