As a business owner, you may often encounter financial difficulties when it comes to cash flow. Local Bill Discounting (LBD) is one way to address this issue. In this article, we will explore what LBD is, LBD full form, how it works, and its benefits.
Cash flow management is critical to the success of any business. Often, small and medium enterprises (SMEs) face cash flow issues due to delayed payments from customers or long payment cycles. In such cases, LBD can be a beneficial option for businesses to meet their short-term financial needs.
What is LBD?
LBD stands for Local Bill Discounting, which is a type of short-term financing that helps businesses to convert their outstanding invoices into cash. In LBD, a company sells its outstanding bills to a financial institution or bank at a discounted rate to meet its immediate cash requirements.
How Does LBD Work?
When a company wants to avail of LBD, it first submits its outstanding invoices to a financial institution or bank. The bank then verifies the invoices and discounts them based on the agreed-upon discount rate. The discounted amount is then credited to the company’s account, and the bank takes the responsibility of collecting payments from the customers.
Types of LBD
There are two types of LBD: with recourse and without recourse. In the case of recourse LBD, the company retains the responsibility of payment if the customer defaults on payment. In contrast, without recourse LBD means that the bank or financial institution takes the responsibility of payment even if the customer defaults.
Eligibility Criteria for LBD
To be eligible for LBD, a company should have a good track record of timely payments and a good credit score. It should also have a minimum turnover and a minimum number of years in business, as per the lender’s requirements.
Documents Required for LBD
The documents required for LBD include invoices, bank statements, balance sheets, profit and loss statements, and tax returns.
Advantages of LBD
LBD offers several benefits to businesses, such as:
- Quick and easy access to funds
- Lower interest rates compared to other forms of short-term financing
- No collateral required
- Better cash flow management
- No ownership dilution
Disadvantages of LBD
While LBD has several advantages, it also has some disadvantages, such as:
- The discount rate may vary based on the company’s creditworthiness.
- It is a short-term solution and cannot be used for long-term financing needs.
- The company may have to bear the responsibility of payment in case of recourse LBD.
LBD vs. Factoring
LBD and factoring are both methods of short-term financing. In LBD, a company sells its outstanding bills to a bank or financial institution, whereas in factoring, a company sells its accounts receivables to a factoring company. Unlike LBD, factoring involves the transfer of ownership of invoices to the factoring company, who takes the responsibility of collecting payments from the customers.
LBD vs. Invoice Discounting
LBD and invoice discounting are also similar methods of financing. However, the main difference between the two is that LBD involves the sale of bills to a bank or financial institution, whereas invoice discounting involves borrowing against the value of outstanding invoices. Additionally, in LBD, the bank takes the responsibility of collecting payments from the customers, while in invoice discounting, the company retains that responsibility.
Top Providers of LBD in India
There are several banks and financial institutions that offer LBD services in India. Some of the top providers of LBD in India include:
- State Bank of India
- HDFC Bank
- ICICI Bank
- Axis Bank
- Yes Bank
Risks Involved in LBD
Like any other financial instrument, LBD also involves some risks. The primary risk in LBD is the credit risk associated with the customer who owes the money. If the customer defaults on payment, the company may have to bear the responsibility of payment in case of recourse LBD.
Precautions to be Taken while Opting for LBD
Before opting for LBD, companies should take some precautions to avoid any risks or challenges. These include:
- Ensuring that the discount rate offered by the bank is competitive and reasonable
- Checking the reputation and credibility of the bank or financial institution offering the LBD services
- Ensuring that the eligibility criteria and documentation requirements are met
- Understanding the terms and conditions of the LBD agreement
FAQs on LBD
Local Bill Discounting (LBD) is a short-term financing method that helps businesses to convert their outstanding invoices into cash.
In LBD, a company sells its outstanding bills to a bank or financial institution at a discounted rate to meet its immediate cash requirements.
There are two types of LBD: with recourse and without recourse.
To be eligible for LBD, a company should have a good track record of timely payments and a good credit score.
The primary risk in LBD is the credit risk associated with the customer who owes the money. If the customer defaults on payment, the company may have to bear the responsibility of payment in case of recourse LBD.
Conclusion
LBD can be a useful tool for businesses to manage their short-term financial needs. By converting outstanding invoices into cash, LBD can help companies maintain a healthy cash flow and meet their immediate financial requirements.
However, like any other financial instrument, LBD also has some disadvantages and risks associated with it. Therefore, companies should take necessary precautions and carefully evaluate the terms and conditions before opting for LBD.