The supply chain is like an ecosystem chain we all know about. One piece of this complex equation is highly dependent on the other. In other words, if there is a compromise in a supplier's ability, it will directly affect the final customer experience. So, to support the financial stability of suppliers, they are offered the option of Channel Finance.
It helps maintain the cash flow in the business by providing the required funds to stock up the company's working capital. Moreover, this finance option is quick and comes with multiple benefits. To know about this in detail, stick to this piece!
Channel financing for businesses is an innovative finance facility to support the working capital needs of channel partners, including dealers, distributors and buyers. The most common way lenders extend this financial help is in the face of cash credit and bill discounts. As a result, businesses can reduce their credit cycle to zero since they get their money upfront.
However, businesses can also access a channel finance facility to get 60 or 90 days of credit based on their business cycle. Thus, it serves as an effective way to strengthen one's supply chain management system.
This program has a definite structure established between financial institutions like KredX and supply chain stakeholders. For example, in KredX, the supplier first raises an invoice when shipping goods or services and sends it to its lender/financier.
After a buyer accepts this invoice, a fund is provided to the supplier in exchange for it. Later, the financier/lender recovers this amount from the buyer when the invoice matures.
This system helps SMEs in several instances. For example, suppose a large corporation requires a supply of raw materials in large quantities from a small supplier. Under normal conditions, due to a cash crunch, the supplier has to reject this order. However, by taking channel financing from financial institutions, they can fulfil the order without feeling any pressure on the liquidity of funds.
If a business can find the right channel partner, it can enjoy the following benefits of channel financing:
Channel financing may not seem feasible to supply companies because of payment period disagreements. It means while the payment cycle of their company is 60 or 90 days, the financing entity stretches it to 180 or 210. In such cases, SMEs can opt for other alternative options to finance their working capital like the ones mentioned below:
The different products companies can choose according to their requirements under channel finance are overdraft facility, cash credit or bill discounting.
Yes, corporates also benefit from channel financing like receiving payment from a lender on day one, a steady supply of working capital, and maintaining customer goodwill.
No, lending companies usually do not require any collateral in exchange for the fund they provide under channel finance.
Many top financial institutions provide the option of customising channel finance solutions. So, one can filter out their options accordingly.