Export Trade Finance - Discount

Discount is that banks buy some forward documents that are promised to be paid. In this case, banks have the Recourse. Forward documents mostly mean the bank documents or documents that other banks guarantee to pay with their own credit. L/C is one of the forward documents. So Bank buys your L/C and gives you money.

In practice, as the technology develops, forgery is advanced. So this service for banks has a high risk. Thus Documentary L/C seldom can get a discount.

For discount under L/C, the bank in exporter side receives the notice from issuing bank/confirming bank. This Notice is normally called Bank Acceptance, Which is a document with issuing bank's stamp saying I will definitely pay the money in a near future. But Exporters can't wait as they are short of money. So the exporter's local bank will give a finance to the exporter upon receiving the notice. This financing method is called the discount. The local bank giving this finance is called discounting bank. 

Moreover, Normally exporters take the L/C / export documents as the mortgage to the local bank to get the discount. export documents including the delivery order of goods. So the local bank can regard it as a future asset. in case they can't get the money, they can also sell goods/mortgage goods.

Discount is a financing method/loan. so exporter's must pay the interest as well which is the same as negotiation/packing loans we discussed before.

The similarity between discount and negotiation

1. Both are short-term financing service 
2. Both have recourse to the appliers.
3. Both have similarities in financing amount, interest calculation,  and currencies. 
4. Both have no limitation for the purpose of money usage. 

The difference between discount and negotiation

1. Discount is under some forward documents under L/C. So money can't be received in short run. Negotiation is applicable for both short /long term L/C. 
2. Financing time is different. Discount is financing upon confirmation from foreign banks. Negotiation is financing upon local exporters submitting some documents. so financing under negotiation should be faster and earlier than the discounting. 
3. The risk is different. Discount has the confirmation from foreign banks(issuing/confirming banks). so the risk is under the country/political/war risk, as long as the issuing bank not bankrupted/with a bad reputation, discounting bank doesn't need to worry so much. Negotiation is financing upon the beneficiary submitting documents, so some extra risks are involved like careless risk from the clerk, payment rejection from issuing bank etc.