Challan discounting, also known as bill discounting or invoice discounting, allows businesses to obtain cash against their unpaid invoices by selling them to financial institutions at a discount. This provides immediate access to working capital to meet various business expenses. For transport operators and fleet owners facing high fuel, toll, and trip costs, challan discounting can be a great financing option.
However, since challan discounting comes with certain costs and risks, it’s important for transporters and logistics companies in India to consider a few key factors before using this service. This article discusses the major factors influencing challan discounting.
Things You Should Know About Challan Discounting
Before opting for challan discounting, businesses should carefully evaluate several challan discounting decision factors to ensure they align with their financial needs and operational requirements.
1. Understanding Financing Needs
The first challan discounting decision factor is to have clarity on the financing needs challan discounting should fulfil. Typically, businesses require funds to manage daily operational expenses until payment is received from clients against completed trips. The financing amount and frequency of funds should be mapped to elements like:
- Fuel costs of vehicles
- Toll charges
- Daily allowance for drivers and helpers
- Repair and maintenance costs
- Other overheads
This gives businesses an estimate of the working capital to be generated from discounted invoices. Quantifying financing needs sets the ground for the next steps of planning and availing challan discounting facilities.
2. Assessing Total Costs
One of the more important parameters is the total cost incurred for obtaining funds against the invoices. This includes:
- Discounting charges: This is expressed as a percentage of the invoice value based on the credit period and customer profile.
- Interest rate: The periodic rate charged on the funds disbursed against invoices.
- Processing fee: One-time or annual fee charged for processing challan discounting limits.
- Other charges: Prepayment penalties or foreclosure charges, if applicable.
Businesses must get a clear breakdown of these costs from prospective financiers to make viable comparisons. In general, opting for higher invoice values and longer usance periods (credit duration) from clients reduces the effective discounting costs. Understanding the cost economics is vital while planning the finances.
3. Turnaround Time and Fund Flow Frequency
For businesses, timely access to liquidity is of the essence in challan discounting facilities. Hence, it is necessary to analyse the turnaround time for financiers—from invoice submission to actual fund disbursal. Typically, leading financiers may take up to a week to complete this process, provided invoices and documents are in order. Some advanced players have reduced this duration to just about a couple of days through greater process automation.
Also, the frequency and flexibility of submitting small batches of invoices play a role, especially for smaller businesses. Options to submit invoices weekly or fortnightly ensure fund flow cycles are better aligned with their working capital cycles. The mode—digital or physical documents—also impact turnaround efficiency.
4. Customer Segmentation
Businesses need to segment their client portfolio into self-managed collections and invoices specifically earmarked for discounting. The customer's credit profile and usage period have a direct bearing on the discounting viability.
Established customers like manufacturing companies, retailers and FMCG distributors provide positive customer profiling. Thus, invoices on such customers get easier acceptance for discounting. Building such a quality portfolio over time allows businesses to obtain better pricing and priority processing.
5. Process Reliability
For businesses, reliable execution of challan discounting processes is paramount. Key aspects to examine here include:
- Seamless periodic submission of invoices and prompt generation of payment advise
- Faster turnaround of actual fund transfer into bank account post payment advice
- Clear communication and updates in case of any invoice discrepancies or rejections
- Well-documented process guides detailing policies and procedures
- Responsive customer support to address periodic queries or issues
- Getting client references and feedback on these aspects assures businesses before finalising the financing partner.
Conclusion
Challan discounting facilities enable all types of businesses to scale up business operations sustainably. However, making well-informed financing decisions is key from a cost and process perspective. Businesses should analyse their fund flow patterns, financing costs across providers, turnaround efficiency, customer segments, and process reliability while selecting the ideal challan discounting partner. This can set the stage for long-term mutually beneficial partnerships, allowing them to focus on their core operations.
