The effect discount is a formula to obtain liquidity for commercial credits. It is usually used by companies that collect their invoices late and need working capital for the development of their business.
It is usually based on advance of an exchange title. However, as you will discover below, there are other types of bill discount that allow the credit to be cashed in a simpler way.
What is the effect discount?
A discount of commercial bills is called a financial operation consisting of anticipate the amount of a credit instrumented in a commercial bill.
“Discount” is a financial term that refers to anticipating a capital that should be realized in the future. It can be considered as the opposite of capitalization (projecting capital to a future period, in exchange for a return).
Thus, it is about anticipating the right to collection that arises from a commercial operation and is reflected in a negotiable instrument that serves as a credit instrument and/or means of payment (it is the so-called "commercial bill").
However, as you will discover below, credits that are not instrumented in commercial paper, but in other types of commercial documents, can also be discounted.
Basically, in a discount operation two subjects intervene:
- The discounter: the customer who has the item in his possession and requests financing.
- The discounter: a credit institution that advances you the funds.
The discounter assigns the right of collection to the discounter and the discounter advances the amount that is reflected in the title, less interest and expenses that may be applied..
When it occurs to a fixed interest rate for any maturity term, it is called “discount to ski pass” and is one of the most used modalities in international trade.
What types of bill discount are there?
The discount classification of effects responds to the type of document in which the credit is instrumented and the way to discount it (if it is punctual or recurring). In this way, we can find the following types of discounts.
The check is an exchange title that is equivalent to cash. It is not a credit instrument: is a payment order. The drawer of the check (person or company that issues it) must have funds in the account. Consequently, there is no type of discount, but the collection of the commercial debt.
However, the check can be issued with a later date, so that it can be cashed in the future. In this case we would be facing a "deferred payment check" and it can be subject to a discount.
He commercial discounts is an operation offered by credit institutions to anticipate the amount of short-term commercial debts.
The client submits to the financial institution a credit title whose expiration has not yet occurred. After carrying out the opportune valuation, the entity delivers the money to the client in exchange for the assignment of the title and the collection rights it contains. The amount delivered corresponds to the nominal value of the bill, but the appropriate interest for the discount is applied.
However, if there is a default, the credit institution does not assume the risk and will charge the client the nominal amount of the title, plus the corresponding expenses.
Some commercial paper discount examples they could be:
- Bill of exchange discount.
- Promissory note discount.
- Commercial discount on invoices.
- Receipt discount.
It is worth mentioning that the commercial discount can also be applied to non-exchange documents, such as receipts, invoices, work certifications or debt acknowledgments.
It is a financial product designed for companies that usually work with commercial paper.
Actually, it is similar to the commercial discount, but with the particularity that this service can be used on a recurring basis.
In other words, the company does not resort to this source of financing circumstantially and therefore does not negotiate each of the operations individually. The client agrees with a financial institution on applicable conditions and the amount of the line (the maximum money that can be anticipated).
Once the discount line is contracted, you can anticipate the amount of the commercial effects that you have in accounting.
As a general rule, commercial effects are those that are regulated by the Exchange and Check Law. However, within the discount rates for bills, it is necessary to make special mention of other documents, such as the invoice trade discount. In this case, it is a non-exchange discount rate.
The advantage of invoice discount or “factoring” is that liquidity can be obtained immediately, without the existence of any type of credit document. It is one of the most agile and flexible financial solutions. It allows offering payment facilities to the company's customers, making it more competitive.
In addition, non-recourse factoring can be contracted, in which the company does not assume the risk of non-payment of the invoice.
In any case, both factoring and the discount of bills can be combined with another type of financing and, in this way, maintain the cash flows that allow commercial activity to be carried out.
If you think that the commercial discount or the invoice discount can be useful to solve liquidity problems, you can contact Alter Finance and we will offer you the necessary advice.