Trade Discount

Companies may require liquidity almost immediate for various reasons, such as the payment of salaries or other obligations in the short term. In this post we are going to deal with one of the forms of financing that businesses are currently resorting to the most, the commercial discounts, in addition to establishing the difference between factoring and trade discount.

What is trade discount?

He commercial discounts, also called effect discount, is a method of financing current or current assets. It is also used for deal with outstanding payments in the short term. Through a commercial discount, a financial entity offers the company in question the advance of the amount of your commercial bills (commonly promissory notes), which should be paid in periods of less than a month, normally. 

Therefore, thanks to financial trade discount, businesses can charge their sales immediately, without having to wait for the bill to expire to receive the money. This makes it a very convenient way to get liquidity when needed.

There are two types of trade discounts, which are the following:

  • permanent discount line: Companies pass all commercial effects that they have to the bank, so that it discounts them.
  • Discount of punctual effects: In this case, the companies only transfer the bills so that they can be discounted in specific moments of need for liquidity.

Another differentiation can be established for the types of bills of exchange discounts, depending on the agreement reached for the collection of commissions and interest, distinguishing between:

  • ordinary business discount: It is the most common. The management fee and interest are deducted from the nominal amount of the effect.
  • ski pass: Both the interest applied and the management commission usually depend on the bill's payment period and its associated risk. However, in the forfeit-type commercial discount, both variables do not depend on maturity or insolvency risk.

As to how trade discount is calculated, the financial entity collects the commission for its service in advance. In addition, interest must be added to the commission, which increases the longer the bill's payment term is. Therefore, when entering the money corresponding to the discount to the company, the amount paid is the Nominal amount of bill minus bank commission and interest.

It should be noted that the financial institution will carry out a previous study of the risk of anticipating the money of the bill to the requesting company, being able to refuse if he considers that there is too much risk in the operation.

What is the difference between factoring and trade discount?

He factoring and trade discount are financial operations that present a similarity: Both are forms of financing consisting of the advance payment to the company. However, it is necessary to clarify the difference between factoring and trade discount.

On the one hand, in factoring operations, the company gives you a part or all of the invoices pending payment to a financial institution. In exchange, the latter advances the amount corresponding to said invoices (minus the corresponding interest and commissions). On the other hand, at a trade discount, HE advances the amount corresponding to a promissory note or a bill of exchange, that is, to an effect. 

Another difference between factoring and trade discount resides in who is made responsible in case of non-payment of the debtor client. In the commercial discounts, the ceding companies will be responsible before financial institutions in non-payment situations. However, in factoring operations, specifically in the non-recourse factoring, the ceding company can avoid assuming the risk in situations of non-payment or delinquency of customers.

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Conclusion

Within the routine of organizations, may arise unforeseen events that give rise to liquidity needs in them. These needs can be covered through different forms of financing oriented in the short term. In this post we wanted to deal with one of them, which we consider very useful, the bills discount or trade discount.

In addition to the commercial discount, at Alter Finance we can provide you with other financial products  that can also be adjusted to the demands of your business. Consult them and contact us if you need advice.

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