Trade Credit, Discounting of Bills, Factoring and GDR (ISC Class 12)
Updated 17 October 2026 · Fact-checked
Trade credit is finance from suppliers by buying on credit. Discounting of bills means selling a bill of exchange to a bank before its due date for cash less a discount. Factoring means selling trade receivables to a factor for an advance and collection services. A GDR is a foreign-currency instrument issued abroad against a company's shares to raise foreign capital.
Understand Trade Credit, Discounting of Bills, Factoring and GDR
The syllabus asks for a *basic understanding*. These sources are mostly short-term and tied to trade, except GDRs, which are a source of long-term foreign capital.
1. Trade credit
Credit given by suppliers to a business for the purchase of goods: the buyer pays after an agreed period. It is a source of finance without any cash changing hands, and appears as creditors or bills payable.
*Merits*: convenient and automatic; no interest if paid on time; grows with the volume of purchases; no security needed.
*Limitations*: loss of cash discount if payment is not immediate; a risk of overtrading and of loss of credit standing if payments are late.
2. Discounting of bills of exchange
A seller who has a bill of exchange accepted by a customer need not wait for the due date. He can sell the bill to a bank before maturity. The bank pays the amount of the bill less a discount (interest for the unexpired period) and collects the full amount from the customer on the due date.
*Discount = Bill amount x Rate of discount x (Unexpired days / 365)*; *Cash received = Bill amount - Discount*.
*Illustration (imaginary)*: bill of ₹1,50,000; 146 days to run; rate 10% a year.
Discount = 1,50,000 x 10/100 x 146/365 = 15,000 x 0.4 = ₹6,000. Cash received = 1,50,000 - 6,000 = ₹1,44,000.
*Merits*: quick cash; low cost; no need to wait for the customer. *Limitations*: the discount is a cost; only for bills already accepted; the bank may recover from the seller if the customer dishonours the bill.
3. Factoring
A financial service in which a business sells its trade receivables (book debts) to a factor (a bank or factoring company). The factor:
- pays an advance (a percentage of the receivables, say 75% to 80%) at once;
- collects the debts on the due dates;
- pays the balance after deducting its fee, and may also provide credit information and sales-ledger service.
*Illustration (imaginary)*: receivables ₹8,00,000; advance 75%; factor's fee 2% of receivables. Advance = 8,00,000 x 75/100 = ₹6,00,000. Fee = 8,00,000 x 2/100 = ₹16,000. Balance paid on collection = 8,00,000 - 6,00,000 - 16,000 = ₹1,84,000. (The advance is received at once; the balance later.)
*Merits*: immediate cash; the business is free from collection work; credit information; improved liquidity. *Limitations*: fee cost; customers may dislike dealing with the factor; may signal weakness.
4. Global depository receipts (GDRs)
A GDR is a negotiable instrument issued abroad by an overseas depository bank against the shares of an Indian company held with a domestic custodian. It is denominated in a foreign currency (usually the US dollar) and listed and traded on foreign stock exchanges. The company raises foreign capital from international investors without listing its shares directly abroad. Holders receive dividends (converted into foreign currency) but usually have no voting rights.
*Merits*: access to large international funds; global visibility; foreign exchange inflow. *Limitations*: costly and complex; foreign regulations; exchange-rate risk.
5. Comparison
| Source | What is sold or given | Who provides | Period |
|---|---|---|---|
| Trade credit | Goods on credit | Suppliers | Short-term |
| Bill discounting | An accepted bill, before maturity | Bank | Short-term |
| Factoring | Receivables | Factor | Short-term |
| GDR | Receipts against shares, abroad | International investors | Long-term |
6. Choosing a source (case skill)
- Need cash against sales already made but not yet paid, with collection trouble: factoring.
- Holding customers' accepted bills: bill discounting.
- Buying raw material now, paying later: trade credit.
- A large company needing foreign capital for expansion: GDR.
Trade Credit, Discounting of Bills, Factoring and GDR: key facts
- Bill discounting
- Discount = bill amount x rate x unexpired days / 365 | Cash received = bill amount - discount
- Use the days left to maturity.
- Factoring
- Advance = receivables x advance %
- Fee = receivables x fee %
- Balance = receivables - advance - fee
- Assumption stated in the question governs the base of the fee.
- GDR
- Issued abroad
- Foreign currency
- Against Indian shares
- Listed on foreign exchanges
- Four features.
How to answer Trade Credit, Discounting of Bills, Factoring and GDR questions
Expect the meaning of each source, a short calculation of discount or factoring, and a choice of the source in a case.
- 1Identify the instrument: a bill of exchange (discounting), receivables (factoring), supplier credit (trade credit), a receipt abroad (GDR).
- 2For the discount, use unexpired days / 365 and subtract the discount from the bill amount.
- 3For factoring, compute the advance, the fee and the balance separately and check that advance + fee + balance = receivables.
- 4Write one merit and one limitation for each source.
Trade Credit, Discounting of Bills, Factoring and GDR in real life
The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.
Factoring
Suppose a garment maker sells goods on 60 days' credit worth ₹10 lakh. Short of cash, it hands over its invoices to a factor, who pays 80% at once and collects the dues later.
Name the source of finance and give the advance amount.
Try it first, then show the solutionSolution
- The business sells its receivables to a factor.
- Advance = 80% of 10,00,000 = ₹8,00,000.
Answer: Factoring; the advance is ₹8,00,000.
Memory hook: Factor buys your invoices.
Trade credit
Imagine a hardware shop that buys goods from a wholesaler with an agreement to pay after 30 days.
Which source is this and why is it useful?
Try it first, then show the solutionSolution
- Goods are bought now and paid for later.
- No cash is needed at the time of purchase.
Answer: Trade credit; the shop finances its stock without paying cash immediately.
Memory hook: Buy now, pay later.
Tricks to remember Trade Credit, Discounting of Bills, Factoring and GDR
Short memory aids. Say each one aloud once, then use it on a question the same day.
Who sells what?
Bill discounting: sell a Bill. Factoring: sell Receivables. Trade credit: Suppliers sell on credit.
Use it when: Telling them apart.
G-D-R
Global, Depository bank, Receipt: issued Abroad in dollars, against Indian shares.
Use it when: GDR.
Trade Credit, Discounting of Bills, Factoring and GDR: solved examples
Ordered from board level to HOTS. Try each one before you open the solution.
Example 1: Identify the source · 1 mark · Very short answerBoard level
A company sells its accepted bill of exchange to a bank before the due date and receives the amount less a deduction. Name the source of finance.
Try it first, then show the solutionSolution
- Selling an accepted bill to a bank before maturity is discounting of the bill.
Answer: Discounting of bills of exchange.
Example 2: GDR facts · 1 mark · MCQBoard level
A global depository receipt is normally denominated in:
(a) Indian rupees
(b) a foreign currency
(c) shares of the foreign bank
(d) gold
Try it first, then show the solutionSolution
- GDRs are issued abroad and denominated in a foreign currency, usually the US dollar.
Answer: (b)
Example 3: Bill discounting calculation · 4 marks · Short answerHarder board level
A trader holds a bill of exchange for ₹2,00,000 accepted by a customer, with 73 days to run. He discounts it with a bank at 9% a year. Find the discount and the cash he receives.
Try it first, then show the solutionSolution
- Discount = 2,00,000 x 9/100 x 73/365.
- 73/365 = 0.2, so discount = 18,000 x 0.2 = ₹3,600.
- Cash received = 2,00,000 - 3,600 = ₹1,96,400.
Answer: Discount ₹3,600; cash received ₹1,96,400.
Example 4: Factoring calculation · 4 marks · Short answerHarder board level
A firm has receivables of ₹6,50,000. A factor gives an advance of 80% at once and charges a fee of 1.5% of the receivables, which is deducted from the balance paid on collection. Find the advance, the fee and the balance finally received by the firm.
Try it first, then show the solutionSolution
- Advance = 6,50,000 x 80/100 = ₹5,20,000.
- Fee = 6,50,000 x 1.5/100 = ₹9,750.
- Balance = 6,50,000 - 5,20,000 - 9,750 = 1,30,000 - 9,750 = ₹1,20,250.
- Check: 5,20,000 + 9,750 + 1,20,250 = 6,50,000.
Answer: Advance ₹5,20,000; fee ₹9,750; balance ₹1,20,250.
Example 5: Compare and advise · 8 marks · Long answerHOTS / competency
Suppose a manufacturer has ₹4 lakh of bills accepted by customers, ₹9 lakh of unpaid invoices of customers with whom it has no bills, and needs to buy raw material worth ₹3 lakh next week. A large part of its working time is lost in chasing the customers for payment. Advise which of trade credit, bill discounting and factoring it should use for each need, explain your choice and mention one limitation each.
Try it first, then show the solutionSolution
- Bills of ₹4 lakh: bill discounting with a bank gives cash now; limitation: the discount is a cost, and the bank may recover if a bill is dishonoured.
- Unpaid invoices of ₹9 lakh without bills: factoring; the factor advances cash and also collects dues, saving time; limitation: the fee, and customers may dislike the factor.
- Raw material of ₹3 lakh: trade credit from the supplier, as no cash is needed now; limitation: loss of cash discount and the risk to credit standing if payment is late.
- Together these meet the cash need without long-term borrowing.
- Factoring directly addresses the time lost in chasing customers.
Answer: Bill discounting for the bills, factoring for the invoices (and collection), trade credit for the raw material; each with a limitation.
Where students lose marks in Trade Credit, Discounting of Bills, Factoring and GDR
The slips examiners see most often, and what to write instead.
Mistake: Using the full bill period instead of the unexpired days
The days to run are overlooked.
Wrong working
Discount = 2,00,000 x 9% x 3 months, using the original period.
Right working
Discount = 2,00,000 x 9/100 x 73/365 = ₹3,600 on the unexpired period.
Do this: Use days left to maturity.
Usually costs: 2 marks.
Mistake: Not checking factoring totals
Advance, fee and balance are computed separately.
Wrong working
Balance = 6,50,000 - 5,20,000 = 1,30,000.
Right working
Balance = 6,50,000 - 5,20,000 - 9,750 = 1,20,250, because the factor's fee is deducted.
Do this: Advance + fee + balance = receivables.
Usually costs: 1-2 marks.
Mistake: Calling factoring a loan
Cash is received at once.
Wrong working
Factoring: the factor lends money against the firm's assets.
Right working
Factoring: the business sells its receivables to a factor, which advances a part, collects the dues and gives the balance less its fee.
Do this: Say 'sells its receivables'.
Usually costs: 1 mark.
Mistake: Writing that GDRs are issued in India in rupees
The word 'Indian' in 'Indian company' misleads.
Wrong working
GDRs are issued in India in rupees.
Right working
GDRs are issued abroad by an overseas depository bank and denominated in a foreign currency.
Do this: Global = abroad.
Usually costs: 1-2 marks.
Exam tips
- The syllabus asks for only a basic understanding of these sources; learn the meaning, one feature and a merit or limitation of each.
- Show the formula first in a discounting question and use 365 days unless the question says otherwise.
- State clearly any assumption on which the fee is calculated in a factoring question.
- For a case, identify what the business holds: bills, receivables, or supplier credit.
Practice questions on Trade Credit, Discounting of Bills, Factoring and GDR
Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.
Q1 · 1 mark · Very short answerBoard level
What is trade credit?
Hint
Suppliers.
Answer
Credit allowed by suppliers to a business for the purchase of goods, to be paid for after an agreed period.
Q2 · 1 mark · Very short answerBoard level
State one merit of factoring for a business.
Hint
Cash and collection.
Answer
It gives immediate cash against receivables and frees the business from the work of collecting debts.
Q3 · 4 marks · Short answerHarder board level
A bill of exchange for ₹1,20,000 is discounted at 12% a year, 73 days before its due date. Find the discount and the net proceeds.
Hint
73/365 = 0.2.
Answer
Discount = 1,20,000 x 12/100 x 73/365 = 14,400 x 0.2 = ₹2,880. Net proceeds = 1,20,000 - 2,880 = ₹1,17,120.
Q4 · 4 marks · Short answerHarder board level
A company wants to raise foreign capital without listing its shares directly on a foreign stock exchange. Name the instrument, explain how it works, and give one merit and one limitation.
Hint
Depository bank abroad.
Answer
A global depository receipt (GDR). An overseas depository bank issues receipts abroad against the company's shares held by a custodian in India; the receipts are denominated in a foreign currency and traded on foreign exchanges. Merit: access to large international funds and global visibility. Limitation: costly and complex, with exchange-rate risk and foreign regulations.
Q5 · 4 marks · Short answerHOTS / competency
Suppose a business with receivables of ₹5,00,000 hesitates to use factoring because it fears losing its customers' goodwill and wants to avoid the fee. Evaluate the concern and suggest the circumstances in which factoring is still worth using.
Hint
Cost against benefit.
Answer
The concern is valid: the factor charges a fee, and some customers may dislike dealing with a third party, which may affect goodwill. But factoring gives immediate cash, saves time and cost of collection, and gives credit information. It is worth using when the firm is short of working capital, has many small debtors, or cannot spare time for collection, and when the benefit of faster cash exceeds the fee.
Test your recall
Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.
1.What does a factor do?Show answer
Buys receivables, advances cash, collects debts and charges a fee.
2.What is deducted when a bill is discounted?Show answer
A discount, which is interest for the unexpired period.
3.In which currency are GDRs denominated?Show answer
A foreign currency, usually the US dollar.
4.Does trade credit need cash at the time of purchase?Show answer
No.
5.Give one limitation of GDRs.Show answer
They are costly and complex, and carry exchange-rate risk.
Trade Credit, Discounting of Bills, Factoring and GDR: frequently asked questions
Is factoring the same as bill discounting?
No. Discounting sells a bill of exchange before it falls due; factoring sells receivables (invoices) and includes collection services.
Is trade credit a short-term or long-term source?
Short-term.
Do GDR holders vote?
Usually not.