Dealer Financing is an indirect loan facility where a retailer works as an intermediary between a buyer and a financial institution. Here a retailer issues funds to its customers by acquiring commercial loans at a low interest. When a retailer receives a credit application from its customers, it circulates that information to its wide-ranging lending network. Customers are presented with a choice of opting for a lender that best suits their requirements. They can negotiate directly with the retailer to secure a deal with affordable terms and conditions.
When a customer opts for dealer finance, a potential lender offers the retailer a quote of the interest rate it will be charging for this loan. Generally, dealers mark up this buy rate to gain extra revenue when it provides credit-based funding to their borrowers.
After the necessary paperwork is done, a dealer has the option to sell the loan to a bank or a third-party financial institution. Then debt-amount collection from the borrowers becomes the sole responsibility of this institution.
How Does A Dealer-Arranged Financing Work
The primary goal of a dealer finance scheme is to provide a comprehensive, time-saving solution to their clients looking to opt for a loan. So the emphasis lies greatly on a flexible framework of this transaction model.
Dealer financing for business is predominant mostly in the automotive retailing sector, as there is a more extensive appeal of on-site financing options. Dealers usually have a pre-established working relationship with credit unions and financial agencies that enable them to assist the customer in completing a loan application.
This scheme is beneficial for customers as a dealer generally offers lucrative deals, including low-cost EMIs, extended loan terms, or special promotions. However, as dealers eventually sell off the loan to the financial agencies, customers usually have to send their monthly payments to these agencies which service their loan.
Eligibility Criteria For Dealer Financing
Entities lending the funds are always averse to risk-taking. But since lending a lump sum amount of money is a high-risk investment, customers must meet some set parameters to guarantee their ability to loan payment.
Some of these eligibility criteria include-
- Steady source of income for customers
- The availability of funds for potential down payment requirements
- Being under the decided age limit
- Ability to provide KYC documents
- Presenting other necessary financial documents
Dealer finance schemes are especially helpful for borrowers who do not have a high credit score. For example, a borrower should ideally have a CIBIL score of 750 and upwards to secure traditional direct financing from a bank or credit union. Meanwhile, the lenient regulatory framework of blockchain-based dealer financing allows customers with poor CIBIL scores to get funding against a higher interest rate.
Needless to say, the outcome is beneficial to both parties involved in the transaction. As customers can opt for big-ticket in-store purchases, the dealer consequently enjoys improved customer loyalty.
Benefits Of Dealer Financing
There are several conveniences that both sellers and buyers can enjoy while opting for this supply chain financing solution process, such as
- There is no need for customers to deal with a separate lender before initiating the purchasing procedure with retailers. As a result, this frictionless sales process has a streamlined workflow. For example, people can drive off with the automobile of their choice when they decide to buy it.
- The enhanced customer experience typically leads to significant growth in the retailer’s average sales rate. For example, according to studies, there is a 32% rise in sales for businesses offering financial options to their customers.
- The application process here is more straightforward for borrowers when compared to traditional lending organisations. Moreover, as mentioned above, customers hold the ability to negotiate here. So naturally, this decentralised lending protocol is effectively borrower-friendly.
Dealer financing for the business sector has become a booming financial trend in recent times. In this blockchain-based decentralised credit system, retailers work as a middleman between their customers and financial agencies. In this model, the retailers share the credit application details of their customers with the banks or credit unions.
Based on the eligibility criteria of the borrowers, a potential lender provides the interest rate quote for the loan. Accordingly, dealers and customers can negotiate the agreement terms beneficial for both parties. After dealers provide their customers with the necessary funding, the loan is sold to a third-party financial organisation that chases the repayment.
With the global financial sector being volatile for the last few years due to the COVID-19 crisis, businesses are increasingly looking to provide alternative supply chain financing solutions. As a result, several fintech service providers like KredX have come to the forefront as a potential all-inclusive digitised measure to resolve the surrounding issues.