The floating discount credit may only arise in connection with goods that a seller transfers to a buyer. Thus, the floating discount credit is a short term financed supplier credit by acceptance of a bank. The company, which offers its customer a supplier credit, benefits from this regulation.
Floating discount loan
In order to be able to speak of a floating discount loan, the bank mentioned above has to buy in a bill from the company and provide the value added to the present value, less a discount. The change is caused by a sale of goods eg an exporter to an importer. According to the agreement, the importer does not need to pay for the goods immediately, but only at a later date. Instead, a bill of exchange is issued on the invoice amount, whereby the customer accepts a payment obligation. The exporter sells this change to the bank. Instead, he receives the equivalent of a discount, but enjoys the benefit of being able to spend more money and thus being more liquid. The Bank, in turn, keeps an eye on the term of payment granted to the importer and deletes the amount noted on the bill of exchange, of course without deducting a discount.
Why is a floating discount loan to be called a loan?
Obviously, it’s more of an advance. However, the legal status of the floating discount loan states that the exporter remains the creditor of the bill of exchange. In the event of late payment, the bank will not contact the importer and, if necessary, issue a reminder, but in the event of non-payment, it will demand the change from the discounting party. Therefore, the bank will check the creditworthiness of the exporter before entering into a floating discount loan.
As already described, the goods transfer is a prerequisite for a bill of exchange discount credit. Bills that spring from a financial transaction are not covered by any claims in the sense outlined above. In this case, the bill of exchange is a way of helping a creditworthy person gain access to cash by signing a creditworthiness petition. However, if two persons suffering from a lack of money mutually accept and pass on a financial change, this is an exchange.
In general, the floating discount credit, nominally, is cheaper than the overdraft facility. However, the floating discount credit is always used for the entire remaining term of the discounted bill of exchange. For this reason, fluctuating loan requirements can lead to so-called “idle times”, which effectively make the floating discount credit more expensive.