While discounting "Trade Bills" by the Banks, the Quality of such bills is to be checked. Explain the various factors to determine the Quality of Trade Bills.

Discounting of Trade bills or Credit Facility against accounts receivables or Debtor Financing is a source of short-term funding, where the borrower can use their accounts receivables as collateral to raise funds from a bank. The bank would typically lend a fraction e.g., 80% or 90% of the face value of the receivables. The fraction varies depending on the quality of receivables the better the quality, the higher the fraction. The borrower still owns the receivables and is responsible for collecting from their debtors. A business should only use - 'Account Receivable Loans' if it keeps a good relationship with its debtors and is sure of the payments. Otherwise, there is a chance that a business might get squeezed between the Bank and the Debtor. Quality of Receivables: Quality of receivables is key in making financing decisions by Banks. Below are a few key factors that decide the quality of a basket of accounts receivables: Credit worthiness of the Debtor: The credit quality of the debtor is essential, as it is ultimately the debtor who makes the payment. So, a debtor with a poor credit rating reduces the quality of the basket and increases the cost of borrowing in terms of interest or reduction of the amount being lent. Duration of Receivables: The duration, or age, of receivables, is the number of days they are outstanding. Long-duration receivables are considered to be of lower quality because the probability of the receivables being paid goes down. Generally, if a receivable is outstanding for more than 90 days, it is treated as a default. Hence, the shorter the duration of the basket, the lower the cost of financing. Industry of the Original Account: The industry to which the original debtor belongs is important, as the macro trends within that industry affect the ability of the debtor to make good on their obligations. It is also important because financial institutions may want to restrict their exposure to certain industries. Quality of Documentation: The quality of documentation that is associated with the account is also very important, as better documentation quality provides clarity of contracts. It also provides the basis for legal recourse in case of a default. Thus, good and clear documentation improves the quality of the receivable basket.