WHY AND WHEN TO DO CHEQUE DISCOUNTING?
Are your cheques drawn from reputable organizations?
Do you need to boost your liquidity for sustained operations in your business?
Cheque discounting solution enables you to access cash for your business requirements while you wait for your cheque(s) to clear.
In today’s business environment, high liquidity is particularly important for the viability of any business. Companies that trade in cash have a distinctive advantage over their competitors. Cheque Discounting ensure continuous flow of your business working capital which would otherwise be affected awaiting the cheque to complete the clearing cycle.
What is Cheque Discounting
Cheque Discounting also called Cheque Cashing helps access immediate cash from lenders against current or postdated cheques. The cash obtained is normally lower than the cheque face value. The deducted amount acts as commission.
In the simplest form of check discounting, the financial institution allows you to take funds against a check without waiting for that check to clear. More sophisticated discounting scenarios use post-dated checks, creating the equivalent of a short-term loan for the amount and time frame of the check. The lending institution typically charges interest on the amount that’s withdrawn, as well as a range of service fees that vary between institutions and countries.
For availing the cheque discounting facility, one needs to check whether they are eligible and meeting criteria /requirements set out by the financial institution.
- Cheques must be drawn on reputable institutions with no record of past unpaid cheques from the drawer.
- Customer must have received cheques from the same drawer before
- The account must be reasonably active for at least six months
- Personal cheques, related entity cheques and foreign currency cheques do not qualify for discounting.
Operation of Cheque Discounting in UAE
- Since the financial institution will receive payment of this cheque on the due date from the client’s customer, one must be a creditworthy customer to use the service, and the cheque must be dated within 90 days after the discounted date.
- Carry out a detailed check of cheque to avoid bounced cheque. The value of the cheque is promptly credited to the account holder of the cheque by financial institutions.
- Bank may credit up to 75% to 80% of the value of the cheque (depending upon customers credit worthiness).
- The amount credited to your account is after the commission is deducted .The remitting bank may additionally deduct its fees for sending the money.
Benefits of Using Cheque Discounting Facilities
A cheque discounting facility is a more flexible and affordable form of corporate finance and company can access to following benefits.
- Access to cash for your business needs.
- Improves company cash conversion cycle by availing cheque discounting facilities.
- Cheque discounting facility injects liquidity to finance your company’s expansion plans.
- Makes your company capable of making further investments.
- Using a cheque discounting facility strengthens your bargaining position with regard to suppliers.
- It helps you to ensure the continuous flow of company’s working capital.
Alia Noor (FCMA, CIMA, MBA, GCC VAT Comp Dip, Oxford fintech programme, COSO Framework)Associate Partner
Ahmad Alagbari Chartered Accountants