Difference between Bill Discounting and Factoring

Bill Discounting: It is a short term finance which is used to meet the immediate requirement of cash. In bill discounting three parties are involved:

·         Drawer

·         Drawee and

·         Payee

The Drawer is a maker of bill of exchange. So, he has to sign the bill of exchange and send it to drawee for acceptance. The Drawer is also known as Creditor who provides goods and services to customer on credit.

The Drawee is a debtor of a company who has to pay for goods and services provided by creditor. The debtor is also known as acceptor who accepts the bill of exchange drawn by drawer. The drawee has to pay the amount mention in bill of exchange on maturity date of bill.

The payee is a person who receives debt amount from drawee. The payee and the drawer is the same person. But in some cases drawer and payee is different person. Payee is the person or institution which holds the bill of exchange till maturity date. If the drawer informs the drawee that the bill is discounted and hold by bank then bank will be the payee.

In bill of discounting the company discounted the bill of exchange from financial institution to meet the immediate need of cash. Bank will charge some interest, fees on bill amount. And after deducting that amount the remaining amount is given to creditor or company.

Factoring:

It is also a short term finance which is used to meet the immediate requirement of cash. In factoring three parties are involved:

·         Creditor

·         Debtor and

·         Factor

The creditor is a person or company who provides goods and services on credit. The creditor act as a seller who sells the invoice or bill receivables of a company to a third party.

The debtor is a person/institution who receives goods and services from company on credit.

The factor is an institution or third party who acts as a buyer by purchasing the invoices or bill from buyer.

In factoring, the company (creditor) who sells all the invoices or bill receivables to a third party to get the immediate cash for business activity. The third party acts as a factor that charges some fees for the services and paid rest of the amount to seller or company.

Difference between Bill Discounting and Factoring:

Point of Difference	Bill Discounting	Factoring
What is bill discounting and factoring?	The company discounted its bill of exchange from financial institution to meet immediate need cash requirement.	The company sells its bill of receivables to third party who act as a factor and charges some fees for providing cash and other services to company
What other services provided by factor and financial institution?	The financial institution only discounting the bills of a company and charges some interest for that.	The third party not only just pay cash for invoices after deducting some charges on it. It is also provide some services like maintaining the sales book, debtors account etc.
Whom the debtor pays the bill amount on maturity date?	In bill discounting the drawee has to pay cash to drawer if the drawer does not inform the drawee about the bill discounting.	In factoring the debtor pay the cash on maturity to the third party.