Commercial Bill/Bill of Exchange :
A commercial bill—also called a bank bill or bill of exchange—is a payment order directing your bank to pay a sum of money to the holder of the bill at a future time.
A commercial bill facility is a flexible credit facility which can give your business a short- or long-term injection of cash to finance an individual export contract or general export growth.
How does it work :
You enter into a commercial bill facility with your bank which allows you to draw one or more bills of exchange for acceptance and discounting by your bank. When establishing a commercial bill facility, you agree with your bank:
- the maximum and minimum amounts for the facility
- the term of the entire facility based on the anticipated funding needs of your business (for example, two years)
- the term (or tenor) of each bill within the facility. Typically, the term of each bill is between seven and 180 days. The term you select determines the intervals at which you’ll pay interest under the facility. This gives you flexibility to match your interest payments to your business cash flows.
At the start of a commercial bill facility, you draw a bill of exchange which your bank accepts and sells for you at a discount—an amount less than the face value of the bill. The discounted amount is the amount you receive from your bank. The difference between the face value of the bill and the discounted amount represents the interest payable by you to the bank at the end of the bill term.
At the end of the bill term, you pay your bank the face value of the bill or, if the facility allows you to do so, roll over your debt by drawing a replacement bill for your bank to accept and discount.
A commercial bill facility may include several rollovers and at each rollover you can choose a different principal amount for the next bill you draw (within the limits set by your bank). This allows you to adjust the amount you borrow to match your business cash flow needs and pay interest only on that amount.
Interest Rate :
The interest rate for bills issued under a commercial bill facility can be fixed or variable. If the interest is fixed, your bank will include a risk premium to cover its exposure to market rate movements.
While you make regular interest payments in a commercial bill facility, you don’t usually have to make regular repayments of principal. At the end of the facility term, you repay the face value of the outstanding bill.
Before accepting your bills, many banks or financial institutions will require that you provide security, such as a mortgage or charge over your property and business assets.