Economics

Discount contract definition/How works/types/examples

Discount contract

The discount contract is a type of credit where the bank anticipates the client that he must comply with the amount of a credit that is not yet expired that he shows in front of a third party, indicating the interests that correspond to the date for this expires and in return receive ownership of the approved credit. Discount contract definition

This type of contract is one of the most relevant operations of banking entities, since they are an efficient legal tool with credit authorization and it is one of the means that banks use the most to provide greater liquidity to their clients.

How does the discount contract work?

The bank discount contract facilitates the early execution of the credit that is not expired, its importance is linked to the realization of long-term sales of goods or services , since the holders receive the information prior to the amount of their credit.

The discount contract and its characteristics are classified as follows:

  • Approved credits must not be sued or overdue.
  • The bank must deduct the interest from the advance payment until its due date, in this way the amount will decrease. Discount contract definition
  • Discounts can be in the form of promissory notes, coupons shares , bills of exchange or ordinary credits.

Discount contract types

The types of discount contract are:

  • Financial discount : This type of discount works as a credit tool where the entity provides the funds to the client without having to make a traditional loan, it is executed as a guarantee in favor of the bank in exchange for the payment of the capital plus interest.
  • Commercial discount: This discount is carried out when the bill of exchange that is discounted anticipates the existing commercial operation between the drawer and the drawee where the payment is the one who generates the effect. This indicates that the existence of effective credit is a support for the bill of exchange that guarantees payment. Discount contract definition

 Examples

  1. The definition of a discount contract refers to the agreement that a creditor has to grant the right of its profits to possible debts that are due in the future.
  2. Its function is to give the user of a loan the opportunity to use it and obtain liquidity prior to its maturity to protect the bank from a possible default.

This contract allows the bank to advance the credit amount together with the interest deduction in exchange for the assignment of the same credit. Discount contract definition

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