Channel financing for
businesses

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Channel Finance

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!

What Is Channel Financing?

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.

How Does Channel Financing Work?

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.

What Are The Benefits Of Channel Financing That Suppliers Can Enjoy?

If a business can find the right channel partner, it can enjoy the following benefits of channel financing:

  • Less Recovery Risk
    The biggest tension of SMEs is a bad debt expense. This risk of not recovering the sale money reduces through channel financing as their financier is responsible for collecting the payment. In comparison, the supply company receives their payment upfront.
  • Fast Payment
    With channel financing, sellers can get their payments within a relatively short period that they would have received after the invoice matures. In fact, some financiers even integrate finance options directly with the supplier sale system. Therefore, it speeds up their funding and streamlines the payment process.
  • Easy Working Capital Acquirement
    Businesses that have started operating recently often face a common problem of not getting enough working capital for growth. With the help of this financing, companies find it easy to run their day-to-day operations. Through channel financing, businesses get funds in a timely manner to meet their day-to-day needs.
  • Smooth Cash Flow
    Channel financing helps meet companies' working capital needs and stock up inventory whenever a request arises. Thus, it reduces the burden on cash flow and ensures a smooth flow.
  • Less Cost Of Capital
    The supplier and the lending company gradually build a long-term relationship in this financing type. So, borrowers can secure loans at a lower interest rate than other conventional loan options where credit is provided to them on the strength of their company balance sheet.
  • Ensures Constant Growth
    When businesses face no problem maintaining adequate working capital, it stabilises their day-to-day operations. This further ensures the constant growth of the company by seizing every opportunity.

Other Alternatives To Get Funds For Working Capital

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:

  • Invoice Discounting
    Invoice discounting or invoice financing is another financing option that businesses can opt for to meet short-term liquidity requirements. In this lending process, financial institutions offer funds in exchange for the invoice issued to customers to sell a good or service. However, the lending company only pays a percentage of money of the total invoice value.
  • Buy Now Pay Later
    SMEs can also opt for the 'Buy Now Pay Later' option, in which finance institutes provide instant payment for the products and services sold. While businesses give credit to their customers, they do not have to wait for their bills to mature to get their payments. Instead, they can get the fund of the same value from lenders.
  • Equipment Finance
    This is another option available to small business owners, especially when planning to expand. Businesses wanting to purchase machinery and equipment often fail due to a cash crunch.

    Entrepreneurs can opt for equipment financing, enabling them to make purchases without the burden of paying for them at once. It is a type of loan which companies can pay off over an extended time. However, this equipment serves as collateral to the funding company.

FAQs

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.