In bank lending, what is meant by bill purchase or bill purchasing?

Introduction / Context:
Bill purchase is a common working capital finance product offered by banks, especially in trade and export finance. It is closely related to bill discounting and factoring and helps businesses convert trade receivables into immediate cash. Examinations in banking and accounting often test this concept because it demonstrates how banks support business cash flows and manage credit risk on receivables.

Given Data / Assumptions:

• A seller has supplied goods or services on credit and holds trade bills or invoices evidencing amounts due from buyers.
• The seller needs cash before the bills or invoices are due for payment.
• A bank is willing to purchase these bills or invoices under agreed terms and charges.
• The bank then has the right to collect the full amount from the buyers at maturity.

Concept / Approach:
In a bill purchase facility, a bank advances funds to the seller by purchasing the bill of exchange or shipping documents accompanied by a bill. The bank may pay the face value minus certain charges or margins. The bank now becomes the holder of the bill and presents it to the buyer for payment when it is due. If the buyer pays, the bank earns income from charges and the time value of money. If the buyer defaults, the risk allocation depends on whether the arrangement is with recourse to the seller or without recourse. The key idea is that the bank is providing early liquidity against trade bills, effectively financing the seller receivables.

Step-by-Step Solution:
Step 1: Identify that bill purchase relates to trade bills or invoices arising from commercial sales on credit. Step 2: Recognise that the seller wants to receive cash earlier than the contractual due date for payment from the buyer. Step 3: Understand that the bank buys these bills, paying the seller an immediate amount and taking over the right to collect from the buyer at maturity. Step 4: Note that the bank charges a fee or discount, reflecting interest for the period and risk involved. Step 5: Select the option that clearly explains this financing process, rather than internal bank purchases or unrelated government schemes.

Verification / Alternative check:
To verify, imagine an exporter who sells goods to an overseas buyer on 90 day credit and draws a bill of exchange on the buyer. The exporter does not want to wait 90 days to get cash to pay suppliers. The bank offers a bill purchase facility and pays the exporter an agreed amount immediately, taking the bill and shipping documents as security. After 90 days, the bank presents the bill to the buyer and collects payment. If all goes well, the exporter enjoys early liquidity, and the bank earns its fee. This practical example matches the definition in the correct option.

Why Other Options Are Wrong:
Option B is wrong because buying furniture and equipment is capital expenditure by the bank for its own operations, not a lending facility to customers. Option C describes direct sale of treasury bills to savers, which is a government borrowing mechanism, not bill purchase of trade receivables. Option D refers to credit card usage, which is consumer credit, not trade bill financing. Option E is incorrect because bill purchase by definition involves a bank or financial institution that provides finance, rather than customers trading bills with each other without any finance.

Common Pitfalls:
Learners sometimes confuse bill purchase with simple cash credit or overdraft facilities, forgetting that bill purchase is linked to specific trade documents and receivables. Another pitfall is treating bill purchase and bill discounting as completely different, when in practice they are closely related and often used interchangeably in exam material. It is also easy to ignore the difference between with recourse and without recourse arrangements, which affects who ultimately bears the credit risk. Keeping in mind that bill purchase is essentially early financing against trade bills helps maintain clarity.

Final Answer:
A facility where a bank provides immediate funds to a customer by purchasing trade bills or invoices, taking over the right to receive payment from the buyer at maturity.