Table of Contents
Definition / explanation
In the case of a bill of exchange, the supplier, as the issuer of the bill, grants the buyer, as the drawee, a credit for the duration of the bill of exchange (usually 3 months). During the bill of exchange term, the buyer can sell the goods financed by the bill of exchange and use the proceeds to redeem the bill on the expiry date.
The supplier, for his part, can sell the bill of exchange to his bank in order to be liquid again. By purchasing the bill of exchange, the bank grants the supplier a discount credit.
Disadvantages of the bill of exchange
The disadvantage of the bill of exchange for the buyer is that he cannot claim a discount. The buyer can avoid this disadvantage by drawing a check / bill of exchange.
With this procedure, the buyer pays the supplier with a check with deduction of a discount; at the same time, the supplier issues a bill of exchange to his own order, which the buyer accepts. Advantage for the buyer: He can claim a discount by granting a relatively cheap discount credit.
The disadvantages of external financing can be seen in the fact that interest has to be paid regardless of the company's earnings situation. In addition, an excessively high proportion of borrowed capital can, under certain circumstances, lead to an undesirable influence of the investor on corporate policy.
Advantages of the bill of exchange
The advantage of this type of financing is that the debt interest to be paid can be claimed as a business expense and reduce income tax or corporation tax.