Here’s to a way ahead: Channel Finance

What is channel finance?

Channel financing is an innovative finance mechanism by which the bank meets the various fund necessities along your supply chain at the supplier or reseller end, thus helping you sustain a seamless business flow along the arteries of the enterprise. 

Channel Financing – Brief

Channel Financing is an innovative product to extend working capital finance to dealers having business relationships with large companies. This may be in the form of either cash credit facilities or as a bill discounting line of credit. Thus in channel financing, the financing bank takes care not only of the corporate manufacturers but also his supplier and the dealer/distributor. Here this is pertinent to note that in case, the supplier or the distributor of the goods to the corporate is competent to arrange their own funds for total requirement, then there is no need for channel financing product. Therefore, this product of financing arises only when the supplier or the distributor is not in a position to meet its requirement of funds from their own sources or from their own bank due to any reasons and the corporate manufactures wants to help them to create seamless supply and faster realization of book receivables from the distributors/dealer.

Products under Channel finance

Banks provide different types of products under channel financing depending on the requirement of the business enterprise specifically these are either overdraft/cash credit or usance bill discounting.

Importance of Channel Finance

Types of Channel Finance

Vendor Finance

Channel financing is made through discounting of bills drawn by the vendor/ supplier of goods and accepted by the corporate. Banks provides bill or invoice discounting facilities to the channel Partners (Vendors/ suppliers) of large companies for making payment on behalf of corporates to the vendors or the suppliers for the goods supplied by them.

Benefits of Vendor Finance

Advantage to corporate	Advantage to vendor/supplier
Assured availability of funds to their channel partner at competitive cost of funds	Steady and competitive cost of funds.
Corporate can use channel finance as a marketing tool to strengthen their relationship and can avail cash discount from their channel partner (vendor)	Additional facility for the vendor which increases liquidity for increased sales.
Increased appetitive for production and have uninterrupted supply of material which results in better management of demand	Payment is received in time which provides liquidity and remote chances of bad debts.
Better management of vendors /suppliers; availing cash discount and uninterrupted supply of material from them can increase the net profit.	In such circumstances, when cash flow is uninterrupted, efficiency and productivity is also enhanced.

Dealer Finance

Channel financing is made through discounting of bills drawn by the corporate and accepted by the channel partner i.e. dealer/distributor by the banks. Banks also provides overdraft facility to the channel partners who have business dealings with the large corporate.

Advantage to corporate	Advantage to dealer /distributor
Assured availability of funds to their channel partner at competitive cost of funds	Steady source of working capital for dealers and distributors at competitive rate of interest.
Corporate can use channel finance as a marketing tool to strengthen their relationship and can avail cash discount from their channel partner (vendor)	Dealers/distributors can avail cash discounts and can get loyalty benefits for increasing the sales.
Better management of book receivables and cash management which increases efficiency and profitability.	The dealers/distributors can increase their profits by increasing sales and also they can reduce their cost of operation.
Ability to introduce payment discipline in the channel partners i.e. dealers and distributors.	The dealers/distributors can avail clean overdraft/cash credit limit on competitive terms

In such like cases, generally, banks stipulates the guarantee of the corporate for the  overdraft or bill discounting facility provided to the dealer or the distributor/vendor/supplier of the corporate company. Channel financing has been suggested for implementation in various forms by various committees set up by Reserve Bank of India.

Last Say

Channel financing is something different from the conventional lending. It is a need based proposition designed to cater to the needs of industries in Agriculture, Automotive, consumer durable, electronics, engineering, FMCGs, Health care, Metal and metal products and pharmaceutical sector etc. It not only helps the Indian business houses penetrate deeper into the market but also creates a value proposition for the MNCs to establish their footprint in the market.

Author

Heli Shah, an MBA graduate is associated with J.Hirani as a Business Analyst. She is fresh soul with humble and optimistic approach who is working in different industries like Manufacturing, Retail, FMCG and Hospitality etc. Flexibility and greediness in learning new things helps her to conquer the challenges coming on her way.

About J.hirani: J.hirani is a Strategic Transformation team which works as a growth partner for different organisations in various industries by providing services like Agile transformation, Scenario mapping, Strategic alignment, Balance scorecard, Digital transformation, Incubating new ventures, Operation excellence and Aligning human capital.

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